Open Forum

New Delhi, 3 September 2025

US Tariff War

CAN INDIA MITIGATE IMPACT?

By Dhurjati Mukherjee 

Amidst the tariff war, India will now become one of the most heavily taxed US trade partners, equal to Brazil but much higher than China (30%), Vietnam (20%), and the EU or Japan (15%). According to estimates, this relative disadvantage will cut India’s exports to the US from $86.5 billion in FY25 to around 50 billion in FY2026. 

Labour-intensive industries, where the US accounts for over 30% of India’s global exports, could see around 70% annual declines. These sectors include shrimps, gems and jewellery, footwear, carpets, chemicals, auto parts etc. Therefore, there’s urgent need for the government to design a revival package for these sectors, focusing on backward linkages, competitive credit and ecosystem support to restore competitiveness. However, goods exports to other markets are projected to grow from over $350 billion in FY2025 to 368 billion, cushioning to some extent the US losses. The bigger driver is service export where it is forecast to jump around 10%, powered by IT business services and healthcare.

 India’s key concern is not the immediate economic impact of tariffs—estimated at 0.5 to 1% of GDP—but rather their effects on jobs and policy. While the short-term loss may be offset, effective agricultural policies could boost real GDP growth by up to 25%. Prime Minister Modi has highlighted the need for efficient local production, improved ease of doing business, and investment in advanced sectors like semiconductors and rare earth magnets. 

The government is evaluating support measures totalling approximately Rs 25,000 crore for exporters as part of the Export Promotion Mission announced in the Budget, spanning six financial years (2025-2031). These measures aim to provide accessible and affordable credit to the export sector, with the mission designed to promote broad-based, inclusive, and sustainable export growth by implementing innovative strategies that go beyond traditional approaches to resolve key challenges faced by exporters, particularly MSMEs. Sectors such as textiles, chemicals, leather, and footwear—which are anticipated to be significantly impacted—are expected to benefit from this support initiative.   

Meanwhile, it’s heartening to hear that US-based S&P Global Ratings upgraded India’s long-term sovereign credit rating to BBB from BBB-, citing strong economic growth, improved monetary policy credibility and sustained fiscal consolidation. The step comes despite the US government imposing a 50% tariff on exports for purchasing Russian oil and dubbed India a ‘dead economy’. S&P stated it expects the impact of US tariffs on the Indian economy to be manageable due to its limited reliance on trade and the dominance of domestic demand in its economy. Further, S&P stated that India’s debt-to-GDP ratio will decline to 78% by fiscal 2029 from 83% in fiscal 2025. 

Though India has a big domestic market, there is a need to accord importance to manufacturing and ensure the private sector joins. With the right technology and the country boasting of a good strength of engineers and technocrats, a proper policy can ensure that growth remains unhindered. But the government must find new markets other than extending help and financial support to exporters in select fields. 

The Union Commerce Secretary Sunil Barthwal has spoken of a four-pronged strategy focused on market diversification for exports and imports, making exports more competitive and strengthening promotion. A key element of the plan is signing more trade agreements, which is expected to help improve market access and seek higher utilisation under existing FTAs. For example, ccurrently the utilisation of concessions under the India-Australia ECTA is 80% but Barthwal says, the intention is to achieve full utilisation. So far, 50-odd countries are being targeted, which account for 90% of exports, with focused strategies to diversify destinations. 

India’s textile sector continues to perform strongly, with substantial international demand for handloom products. More than 40% of the country’s textiles and apparel—including handicrafts—are exported, with the US, EU, and UK accounting for over half of the trade. The industry has experienced consistent annual growth. Industrial estimates project that India’s textile and apparel market will reach approximately $230 billion this fiscal year and could climb to $647 billion by 2033, at an anticipated compound annual growth rate of nearly 12%. Recognised globally for its premium cotton and silk production, India is well-positioned to leverage this advantage by integrating technological innovation with traditional handloom expertise, thereby facilitating significant transformation within the sector. 

Likewise, the steel sector has witnessed significant growth in production units, and India is projected to potentially eliminate the need for imports in the near future. To support domestic manufacturers following a notable surge in imports that has adversely impacted local industry, a three-year safeguard duty of 11-12% is under consideration. This measure would apply to hot and cold rolled coils, sheets and plates, colour-coated coils and sheets, as well as steel coated with zinc, aluminium, magnesium, and similar materials. 

In meantime, economists have rightly said pointed out that unemployment and underemployment, economic inequality with public and private sector debt burdens increasing, remain areas of concern. Moreover, the downward trajectory in personal household savings continues unimpeded. Plus, a big question mark hangs on the impact of AI on job creation. Labour saving techniques would have to be countered by the government by helping sectors that are labour-intensive and have the potential to create employment opportunities.  

Simultaneously increasing incomes of the bottom 20% of the population, either working as marginal farmers or those in the informal sector, are big challenges for the country. As per projections, informal sectors are to hit workers. In a recent study, real wages of informal workers, according to Jean Drèze, have remained virtually stagnant for the entire period of the Modi regime. There is thus an imperative need to improve conditions of these workers, including the working environment, and ensure that they are paid minimum wages. 

Some experts estimated that $50-$60 billion worth of Indian goods will be hit by the tariffs. However, with the Indian economy quite strong and the public sector doing equally well, in areas such as defence manufacturing, space technology, steel production, prospects don’t look very dim. India continues to be a leading exporter in gems and jewellery, pharmaceuticals, seafood and textiles and it should remain somewhat stable, even if the US market becomes narrower. 

Finally, there is no scope for complacency and serious attention needs to be given to help exporters and continue sustained promotional campaigns launched in traditional as well as new markets, showcasing Indian products. Even defence exports should see a quantum jump with India collaborating with France and Israel to manufacture various types of equipment. All strategies to mitigate tariff effects should be carefully evaluated. ---INFA 

(Copyright, India News & Feature Alliance)