US Tariffs: The ripple effect on India’s economy — a holistic analysis

The imposition of a 26% tariff on Indian imports by the United States, as part of President Donald Trump’s “Liberation Day” initiative, has significant implications for the Indian economy. This move is poised to affect various sectors, potentially altering trade dynamics and economic growth trajectories.​

This has reignited debates about global trade dynamics and their cascading effects on emerging economies like India. While the tariffs primarily target sectors such as steel, aluminum, and technology, their implications extend far beyond these industries, reshaping India’s export landscape, domestic manufacturing, and strategic economic partnerships. The following sectors will see the impacts immediately:  

Metals  
India’s steel and aluminum exports to the US—worth $3.2 billion in FY24—face immediate headwinds. The US accounts for about 6% of India’s total steel exports, and tariffs ranging from 10-25% could render Indian products less competitive against domestic US manufacturers. For instance, JSW Steel, which exports nearly 15% of its US-bound shipments, may need to absorb costs or pivot to alternative markets like Southeast Asia. However, this comes with challenges. Vietnam and Indonesia already supply 22% of US steel imports, creating intense competition.

But the silver line is that the domestic demand for steel remains robust. India’s infrastructure push under the National Infrastructure Pipeline (NIP), requiring 300 million tonnes of steel by 2030, could offset export losses. However, MSMEs in the metals sector—which contribute 40% of India’s manufacturing output—may struggle with price volatility and liquidity crunches.

Textiles & Apparel

While not directly targeted, India’s $12.3 billion textile exports to the US (2023) face indirect risks. The tariffs could disrupt supply chains, particularly for synthetic fabrics and yarns, where Chinese imports (subject to higher tariffs) are often re-routed through India. This “transhipment” scrutiny could delay shipments and increase compliance costs.

Take the case of Tirupur’s knitwear cluster — 60% of its $4.5 billion exports go to the US. New tariffs on raw materials like specialty fibers (often imported from China) could squeeze margins for its more than 15,000 micro, small and medium (MSM) units. Without government support, such as the Production-Linked Incentive (PLI) scheme expansions, smaller players risk losing market share to Bangladesh and Vietnam, whose duty-free access to the US under the Generalised System of Preferences (GSP) provides a 10-15% cost advantage.

Technology & Electronics

The US tariffs on semiconductors and tech components (aimed at China) present a paradoxical opportunity. India’s electronics exports to the US surged to $8.9 billion in FY24, driven by smartphones and IT hardware. With global firms diversifying from China, India could attract investments in high-tech manufacturing. For example, Apple’s suppliers, like Tata Electronics, are scaling up Indian operations to meet US demand, leveraging India’s 6.5% PLI incentives for electronics.

Additionally, India’s electronics imports still outpace exports by 3:1, and tariffs on critical components like printed circuit boards (PCBs) could raise production costs. The lack of a robust semiconductor ecosystem further complicates matters, despite the government’s $10 billion chip-making initiative.

Gems and Jewellery

Similarly, the gems and jewellery sector, which exports over $9 billion worth of products to the US, is expected to experience a sharp decline in demand due to higher costs for American consumers.

Other Challenging Factors 

Trade Deficit Pressures: India’s trade deficit with the US stood at $28 billion in FY24. While tariffs may narrow this gap by curbing imports (e.g., US machinery and aerospace components), export contractions could offset gains.

The tariffs are projected to reduce Indian exports to the US by approximately $30-33 billion, equating to a 0.8-0.9% contraction in India’s GDP. This downturn could exacerbate existing economic challenges, including a slowdown in growth and weakened consumer confidence.

Currency Volatility: The rupee, already under pressure at ₹83.5/USD, may face additional strain if export revenues decline. This could trigger RBI interventions to stabilise forex reserves, currently at $651 billion.

Inflationary Risks: Higher input costs for tariff-affected sectors could trickle into consumer prices. For instance, a 10% rise in steel prices impacts construction costs, affecting real estate and infrastructure projects.

The MSME Dilemma: The lack of resources to swiftly adapt to the changing trade environment is a major concern for MSMEs. For instance, a Coimbatore-based auto components manufacturer, when faced a 12% cost increase on aluminum imports due to retaliatory tariffs in 2019, immediately renegotiated supplier contracts and adopted a lean manufacturing. This helped it reduce waste by 18%, offsetting tariff impacts.

But such agility remains rare among India’s 63 million MSMEs, many of which lack the resources to adapt to the changes immediately. 

Strategic Recommendations

• • Diversify Export Markets: Accelerate Free Trade Agreement (FTA) negotiations with the EU and UK to reduce US dependency. India’s exports to FTA partners grew 13% YoY in 2023 compared to 2% for non-FTA countries.
  • Boost Domestic Value Chains: Expand PLI schemes to include SMEs in electronics and specialty chemicals, enhancing self-reliance.
  • Leverage Digital Infrastructure: Use AI-driven supply chain platforms to identify tariff-agnostic sourcing routes, as implemented by a Pune-based engineering firm we partnered with, reducing logistics costs by 22%.

The Road Ahead

While US tariffs pose short-term challenges, they also catalyse structural reforms. India’s manufacturing sector, contributing 17% to the GDP,  must prioritise innovation and sustainability to compete globally. The government’s focus on “China-plus-one” strategies and quality compliance (e.g., BIS certifications) will be critical. 

As the global trade order evolves, India’s ability to transform challenges into opportunities will shape its economic trajectory in the coming decade. The question isn’t whether India can adapt, but how swiftly—and how effectively its policymakers and business leaders can collaborate to turn adversity into advantage.

—The author,Mukul Goyal, is Co-founder of Stratefix Consulting. The views are personal.