Tariffs at 50% take off; now for the Indian response

28 Aug 2025 , 09:08 AM

50% TARIFFS TAKES OFF FOR INDIA

As of the morning of August 27, 2025; India is being subjected to 50% tariffs on US exports. This includes 25% reciprocal tariffs for high tariff levels, and an additional punitive tariff of 25% as India continues to buy oil and defence products from Russia. The only way India could have reduced the burden of the reciprocal tariffs was to either sign a trade deal with the US or to stop buying crude oil from Russia. However, neither of that has happened.

The trade deal fell through as India was unwilling to give free access to the US in the area of agriculture, dairy products, and GM seeds. These are sensitive areas as they are large job creators in India. Regarding buying oil from Russia, India has been firm that the US should not come in the way of India ensuring energy security for its citizens. This resulted in peak tariffs on Indian exports to the US; even stretching up to 60% in some cases.

THERE WILL BE PAIN IN THE SHORT TO MEDIUM TERM

It is not just that US is one of India’s biggest trading partners. The US is also India’s biggest source of a trade surplus. For now, pharma, energy, and electronics exports are exempted from the steep tariffs, but that would still imply that about $45-$50 billion of Indian exports  to the US will get impacted. Some of the sectors that would be worst affected are textiles, gems & jewellers, select chemicals, shrimps, and handicrafts. That is a lot of MSME pain.

Till now we are only talking about merchandise trade, and the good news is that services trade may not be hit by this order. However, the expectation is that if the stand-off continues, then the export squeeze may eventually spread to services also. Irrespective of the optimism in some corners, short to medium pain is inevitable. The bigger question is; what can India do in the longer run to ringfence its trade basket from such arm-twisting?

FIRSTLY, LOOK AT A BROADER TRADE ENGAGEMENT

A crisis forces the economy to look beyond the tried  and tested pockets. For years, India relied heavily on OPEC for its oil imports. When Europe imposed sanctions on Russia, most of the OPEC oil was directed to fill these shortages. However, India made up the shortfall by heavily relying on Russia, and today Russia accounts for 35% of its oil import basket. There are 3 mandates for India in terms of trade engagement.

The first mandate is to expand trade with other big blocs like EU, UK, China, Russia, Asia, Latin America etc. The second mandate is to improve trade linkages with countries in Africa, Latin America, and Eastern Europe; that could have a much bigger role in global economics in the coming years. The third mandate is to quickly stitch a series of trade deals that would ensure preferential treatment for India. Yes, exports need a big push too.

SECONDLY, EXPAND THE DOMESTIC INDIAN MARKET

India has traditionally been an economy driven by domestic consumption not exports. Private spending in India is closer to 63% of GDP, which is substantial. The domestic consumption can be given a leg-up with a number of measures. We have already seen a major revamp of the GST rates to reduce the burden on the consuming classes. Secondly, once borrowing costs drop sharply, one can see an all-round expansion in the domestic market; which will make up for loss of US exports manifold. Also, consumption in Tier 2 and Tier 3 cities can be a big story and the focus has to shift to boosting consumption in these pockets also in a big way. That can have a multiplier effect on domestic consumption.

THIRDLY, NOW IS THE TIME TO OPEN THE GATES TO ENTREPRENEURSHIP

In the last few years, India has produced world-class entrepreneurs. However, we have struggled to make a sustainable model of it, due to the complexity of doing business in India. This is the time to give sops to entrepreneurs, give them honourable exit routes, and boost ease of doing business. It is ridiculous to hold up business performance due to approvals and bureaucratic lethargy. That has to change.

Many of these changes may look easy on paper, but tough in practice. That is where the leadership must bring in its decisive approach. There will be pain in the short run, but India can turn this into an advantage in the long run!