US Imposing Tariffs on India

The US's decision to raise tariffs on India, particularly targeting the continued purchase of Russian oil, has had significant implications for the bilateral trade relationship between the two countries.

Factors Leading to the US Imposing Tariffs on India

1. Stalled Trade Negotiations: Despite ongoing discussions, India and the US couldn't reach an agreement on liberalizing sensitive sectors like agriculture and dairy, which were major points of contention during the talks.

2. High Tariffs and Barriers: The US raised concerns about India's high tariffs on various goods, such as pharmaceuticals, electronics, and agriculture, which create market access imbalances.

3. Purchase of Russian Oil & Defense Equipment: India's continued purchase of Russian oil and military equipment was cited as a primary factor in the US's decision to impose tariffs. The US government voiced concerns that these purchases could undermine sanctions enforcement.

4. US Trade Deficit with India: The $45 billion trade deficit the US maintains with India added pressure, leading to the US seeking ways to address the imbalance, such as imposing additional tariffs.

5. Comparative Pressure: The US has secured favorable trade deals with countries like Japan and Vietnam, which are seen as more aligned with US trade expectations. India, in this context, faces growing pressure to comply with similar terms.

Key Highlights of India-US Trade Relations

1. Trade Volume: The US remains India's largest trading partner, with bilateral trade reaching $131.84 billion in 2024-25.

2. Agricultural Imports & Exports: India's imports of US agricultural products rose by 49.1% in the first half of 2025, while exports to the US grew by 24.1%.

3. Foreign Direct Investment (FDI): The US is India's third-largest source of FDI, totaling $4.99 billion in FY 2023-24.

4. Cooperation on SMEs: In 2024, both countries signed a Memorandum of Understanding (MoU) to promote cooperation in Small and Medium Enterprises (SMEs), which highlights mutual interest in driving innovation and growth.

Implications of the US Tariff on India

1. Oil Imports:

   • India imports 88% of its crude oil, with over 35% coming from Russia. This has been a critical point for the US, as India balances energy security needs with geopolitical considerations.

2. Impact on Exports:

   • The new tariff could directly affect about 10% of India's total exports to the US, valued at around $87 billion annually.

   • Sectors like electronics (smartphones), pharmaceuticals, textiles, garments, gems and jewellery, and automobile components are expected to be hit hard.

3. Pressure on Economic Growth and Jobs:

   • GDP growth forecasts for FY 2025-26 have been downgraded to 6.5% from 6.7%, highlighting potential negative impacts on economic growth.

   • Job losses are expected, especially in labor-intensive industries such as textiles and jewelry, which heavily rely on the US market.

4. Loss of Cost Competitiveness:

   • With India facing a higher tariff, its products may become less competitive compared to alternatives from countries like Vietnam and Indonesia, which face lower tariffs (around 20%).

5. Disruption to Diplomatic Relations:

   • The move has strained diplomatic ties and undermines expectations of preferential treatment in future trade negotiations.

   • Broader issues, including India's economic policies and its ties with Russia, remain contentious and could lead to further disruptions in trade.

6. Impact on Financial Markets:

   • Indian stock markets initially reacted negatively, with 40 export-focused companies seeing sharp drops in share prices.

   • Exporters might struggle to absorb the cost of tariffs, leading to shrinking profit margins or passing on costs to consumers.

Strategies to Mitigate the Impact

1. Accelerate Negotiations:

   • India has expressed its commitment to securing a fair and balanced trade agreement with the US. Additional rounds of talks are scheduled, and both countries aim to resolve outstanding issues such as agriculture and MSMEs.

2. Diversify Export Markets:

   • India can reduce its dependency on the US by strengthening trade relationships with other major economies. This could include fast-tracking free trade agreements with regions such as the European Union, Gulf nations, and the East Asian bloc.

3. Enhance Domestic Competitiveness:

   • India should focus on boosting productivity and innovation to make its products more competitive globally, moving up the value chain in sectors like textiles, electronics, and pharmaceuticals.

4. Support Vulnerable Sectors:

   • India should consider subsidies, faster refunds of export duties, and marketing assistance to help sectors like textiles and jewelry cope with the immediate impact of tariffs.

5. Strategic Diversification of Oil Imports:

   • India can reduce its reliance on Russian crude oil by diversifying imports from regions like the Middle East and Africa, and focusing on sustainable energy practices.

Conclusion

The US tariff hike presents a complex challenge for India, impacting key export sectors, growth projections, and diplomatic relations. However, it also provides an opportunity for India to diversify its markets, improve domestic competitiveness, and strengthen strategic partnerships with other regions and economies. Accelerating trade negotiations and adjusting its energy and trade policies will be critical to safeguarding India's long-term interests and preserving its position in the global trade landscape