Will Trump’s Tariffs Derail India’s Economy?

By Shashi Tharoor - Project Syndicate | Mar 17, 2025

The US administration’s plan to impose “reciprocal” import tariffs could severely curtail key Indian exports, including chemicals, metals, auto parts, and pharmaceuticals, leading to job losses and undermining fiscal stability. India has little choice but to lower its own tariffs while negotiating improved access to the US market.

NEW DELHI – US President Donald Trump’s tariff threats have dominated headlines in India in recent weeks. Earlier this month, Trump announced that his “reciprocal tariffs” – matching other countries’ tariffs on American goods – will go into effect on April 2, causing Indian exporters to panic at the prospect of being embroiled in Trump’s escalating trade war.

Trump’s unpredictability offers little solace. While he recently suspended tariffs on cars and automobile parts from Mexico and Canada for one month – ostensibly to give US automakers time to ramp up domestic production – any hope that India might receive similar exemptions is, at best, wishful thinking.

During his February visit to the United States, Indian Prime Minister Narendra Modi did achieve an important goal: a nine-month negotiation process, set to conclude by autumn, on a new bilateral trade deal. But this timeline has no bearing on the reciprocal tariffs set to take effect next month. In his March 4 State of the Union address, Trump singled out India as a major tariff abuser and reiterated his commitment to imposing reciprocal duties.

The economic impact on India, which runs a trade surplus with the US, could be significant. India exported goods worth nearly $74 billion to the US in 2024, and estimates suggest that Trump’s new tariffs could cost the country up to $7 billion annually.

But the implications could be much more far-reaching. One analysis estimates that India effectively imposes a 9.5% tariff on US goods, while US levies on Indian imports are only 3%. If Trump follows through on his pledge of full tariff reciprocity, that imbalance will vanish – along with the cost advantages many Indian exporters currently enjoy. Indian products will become less competitive, leading to a decline in export revenues and job losses, especially in labor-intensive industries. Critical sectors – including chemicals, metals, jewelry, automobiles and auto parts, textiles, pharmaceuticals, and food products – are expected to be hit the hardest.

The impact of reciprocal tariffs also depends on their structure – specifically, which products they target and how broadly they are applied. Will tariffs be imposed on entire categories of goods, such as fruit, or specific items, like apples, which India does not export to the US? If the tariffs apply to broad categories or single out major Indian exports like mangoes and oranges, they could significantly restrict India’s access to the US market.

This would put India in a difficult position: negotiate an exemption or urgently seek alternative markets. While Indian officials have rushed to Washington, hoping to gauge the Trump administration’s intentions before the reciprocal tariffs kick in, it appears they have found little clarity.

Trump’s 25% tariff on automobile parts would undoubtedly hurt India, a major producer. But Indian exporters are no more vulnerable than their counterparts in Mexico and China. If US tariffs are applied to all countries, they will drive up costs for everyone.

The greater risk for India lies in the potential long-term impact on the US automotive industry, which relies heavily on imported parts. If Trump’s tariffs lead to a massive resurgence of domestic manufacturing and a sharp decline in imports, Indian suppliers will inevitably suffer. But such a shift would take time, and given existing wage disparities, US-made parts will likely remain more expensive than Indian imports.

With projections suggesting that lower exports could cause India’s annual GDP growth to slow significantly, Modi’s government has scrambled to placate the Trump administration with preemptive concessions. The 2025-26 Union budget cuts tariffs on US-made bourbon, wines, and electric vehicles. Even Harley-Davidson motorcycles, a frequent point of contention for Trump, will now cost less in India.

Will that be enough to placate Trump? If the US matches India’s 10% tariff on American pharmaceutical imports, it could eliminate Indian manufacturers’ current cost advantage. This is no small concern, given that pharmaceutical exports to the US account for about 31% of India’s total exports. That reflects India’s significance as a producer of the generic drugs sold in US pharmacies. If Trump’s tariffs drive up consumer prices, would US companies start producing generic drugs domestically, potentially undermining India’s most lucrative export sector?

Then there are the unknown unknowns. Will the Trump administration impose even higher tariffs on other countries that compete with India for the US market? And if Indian exporters lose access to the US market, could they find alternative buyers?

Trump has already touted his success in dealing with India. During a recent White House briefing, he declared, “India charges us massive tariffs, you can’t even sell anything into India. It’s almost restrictive.” But he claimed that India had “agreed to cut their tariffs way down now because somebody is finally exposing them for what they have done.”

Modi’s government has been quick to downplay the perception that it yielded to US pressure. But Trump’s remarks are bound to trigger intense soul-searching among Indian policymakers. India has long used tariffs to protect its domestic industries, particularly agriculture, automobiles, and electronics. Reducing tariffs could expose these industries to fierce import competition, threatening local businesses and jobs.

India’s deep-seated preference for protectionist policies, rooted in its colonial past, will not be easily abandoned. Given that tariffs also serve as a vital source of government revenue, a sudden reduction could disrupt fiscal stability, especially when India must juggle competing economic priorities, such as infrastructure investment and funding essential welfare programs.

Some concessions, of course, will be unavoidable. In the coming months, India will have little choice but to explore strategic tariff reductions in select sectors while negotiating broader trade benefits and improved access to the US market.

Admittedly, preserving India’s economic sovereignty while making meaningful concessions to maintain strong trade ties with the US will require a delicate balancing act. With the October deadline for a bilateral trade deal looming, the stakes of striking the right balance could not be higher.

Shashi Tharoor, a former UN under-secretary-general and former Indian Minister of State for External Affairs and Minister of State for Human Resource Development, is an MP for the Indian National Congress and Chairman of the Parliamentary Standing Committee on External Affairs. He was re-elected to the Lok Sabha for a fourth successive term, representing Thiruvananthapuram. He is the author, most recently, of Ambedkar: A Life (Aleph Book Company, 2022).

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