In an unexpected development, India now faces a 50 per cent tariff on its goods exports to the United States, a hurdle higher than that of almost any other country in the world. As a result, the government needs to consider how it should respond. While there are political considerations that it will need to take into account, the objective is clear from an economic point of view: Mitigate the damage, so India can return to rapid growth. Unfortunately, this task is complicated because overseas prospects have dimmed even as the domestic economy has been slowing down.
How severe is this tariff shock? Many analysts have argued that its impact will be limited. They point out that goods exports to the US account for only 2 per cent of India’s gross domestic product or GDP, only two-thirds of which will be affected, since pharmaceuticals, electronics, and petroleum products have been exempted.
However, this line of reasoning overlooks the bigger picture. The US is not just India’s largest export market — it is also a critical economic partner. Consequently, the tariff shock will not only affect trade flows — it will rattle investor confidence, disrupt supply chains, and chip away at India’s long-term export competitiveness. The real risk lies in these ripple effects, which extend far beyond the immediate numbers.
To understand why, consider the plight of three types of firms.
The first and the most obvious are global manufacturers. India has been pitching itself as the next global manufacturing hub, especially for firms exporting to the US or diversifying away from China. This was seen as a potential game-changer for India’s growth path. With a young, increasingly skilled workforce and democratic stability, the advantage seemed clear. However, that edge has now been wiped out by a 50 per cent US tariff. Even at the reciprocal 25 per cent imposed on August 7, India would remain less competitive than most of its Asian rivals who face only 19–20 per cent tariffs on their US exports. If this differential persists, India risks losing out on a once-in-a-generation chance to become the world’s manufacturing workshop.
It’s not only exporters of goods who stand to lose. The impact could extend to services exporters too. Nearly 60 per cent of India’s 1,700-plus Global Capability Centres are US-headquartered. While tariffs don’t directly touch them, worsening US–India relations could make the parent firms wary of expanding here. That would be a serious setback, since services exports have been a cornerstone of India’s post-Covid growth.
Finally, consider domestic manufacturers. They may not export much but many of them rely heavily on foreign inputs. If India even considers imposing retaliatory measures on the US, to add to those imposed earlier on China, it risks stalling their investment plan further.
The tariff shock therefore threatens to ripple through the entire economy. Added to this, high-frequency data already point to an economic slowdown. Non-food bank credit growth has slipped to 10 per cent from 14 per cent a year ago, merchandise exports rose just 2 per cent in April–June, GST collections slowed to 6 per cent from 11 per cent, passenger vehicle sales have slumped, indicating sluggish urban demand, and the real estate boom of the past few years has stalled, creating a growing stock of unsold homes in major cities.
In other words, the US tariff shock could not have come at a worse time.
How should India respond? First and foremost, India must resist the temptation to turn inward. Protectionism has never delivered rapid growth —India’s own pre-1991 record proves it, and no other country has succeeded that way. The US may be leaning protectionist now, but India cannot afford to repeat that mistake.
Instead of turning inward, India should help its exporters by deepening trade ties with multiple other countries. The deal with the United Kingdom is a welcome step, while negotiations with the European Union are vital and must be expedited. India should also pursue agreements with East and Southeast Asia, to integrate more firmly into global supply chains. That will mean lowering its tariff and non-tariff barriers, which remain among the highest in Asia. In today’s interconnected world, a strategy of self-sufficiency would be self-defeating.
At the same time, Indian policymakers must move beyond firefighting and implement reforms that unlock India’s growth potential. Reviving private investment, boosting manufacturing competitiveness, and creating jobs at scale will require cutting red tape, simplifying regulations, improving the ease of doing business, and investing in skills and not just physical infrastructure. Recent announcements — such as rationalising goods and services tax (GST) rates and setting up a Reforms Committee — are encouraging, but the real test will lie in the details and, above all, in implementation.
Finally, this setback must not push India into an anti-US stance. Frictions are inevitable in such relationships, but the US remains far too important an economic partner to sideline. India’s long-term objective should be to strengthen, and not weaken, its economic engagement with the US, by negotiating progressively better and more comprehensive trade deals.
In many ways, this could be India’s second 1991 moment. The crisis may not be as visible this time, but the stakes are just as high: the economy is at a crucial crossroads, and any policy misstep now could trap India in lower-middle-income status for decades to come.
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