During his 2024 Presidential campaign, President Trump had vowed to impose a wave of tariffs on key U.S. trading partners. Now, the White House has issued a series of memorandums and statements confirming the introduction of Reciprocal Tariffs. This policy aims to correct trade imbalances, boost U.S. tax revenues, and curb illegal trade activities.
As part of executive orders issued between 1st to 25th February, 2025, the U.S. has imposed a 25% tariff on steel and aluminum imports from Canada, Mexico, and China. Additionally, from April 2, 2025, higher tariffs will apply to Indian imports. Given India’s economic dependence on U.S. trade, these measures pose significant challenges and require strategic navigation.
Short-Term Impact on India
1. Economic Growth
Economists predict a 0.3% reduction in India’s GDP growth in the next fiscal year if a full-scale tariff war ensues. A partial tariff increase may have a negligible impact but could still slow down the economic momentum of India.
2. Trade Deficit Concerns
If India reduces tariffs without securing reciprocal concessions, its Current Account deficit may widen by 1.3% of the GDP for Fiscal Year 2026, negatively impacting the economy.
3. Export Sector Challenges
- Jewelry, pharmaceuticals, textiles, and chemicals—major Indian export industries—could face increased tariffs.
- The pharmaceutical sector may be somewhat shielded, as the U.S. relies on Indian generic drugs to keep its healthcare costs in check.
- Textiles and chemicals could be more vulnerable due to U.S. protectionist policies, potentially leading to a decline in exports.
4. Cheaper U.S. Imports & Domestic Competition
- If India lowers its tariffs as a countermeasure, American goods, including automobiles, electronics, and agricultural products, could become more affordable for Indian consumers.
- This could lead to increased competition and put pressure on domestic manufacturers.
How Can India maneuver the Challenges into Opportunities?
1. Trade Diversification
- To counterbalance U.S. tariff pressures, India is actively negotiating a Free Trade Agreement (FTA) with the European Union, set to be finalized by the end of 2025.
- This agreement could reduce India’s reliance on U.S. trade, expand its access to European markets, and mitigate economic risks.
2. Bilateral Negotiations & Tariff Rebalancing
- India must engage in high-level trade talks to negotiate sector-specific tariff reductions while ensuring mutual concessions from the U.S.
- Leveraging its pharmaceutical dominance, could be a key bargaining tool to protect other export sectors.
3. Strengthening Domestic Manufacturing
- Government initiatives such as ‘Make in India’ and ‘Bharat Trade Net’ should be reinforced to streamline set up procedure for global investors, reduce dependence on imports and bolster domestic industries.
- Tax incentives and subsidies could help Indian manufacturers compete with cheaper U.S. imports.
4. Expanding Trade Alliances
Strengthening economic ties with BRICS, ASEAN, Middle Eastern, and African nations could open new trade opportunities and lessen dependence on U.S. trade relations.
Summary
While the U.S. Reciprocal Tariffs present economic challenges for India, proactive trade diversification, strategic negotiations, and domestic industry support can help mitigate its adverse effects. Further PM Modi’s recent visit to US signaled towards the ongoing efforts to reduce tariff and non-tariff barriers by India as against concessions from higher tariffs from the US. India must adopt a balanced approach to maintain trade relations while safeguarding its economic interests in the face of rising protectionism.
Authors
Himanshi Kandari & Bhawna Chaurasia, 1st Year Articles, Prasad Azad & Co., CAs
8th March, 2025
Only for Information Purpose