Why in news?

The US has imposed an additional 25% tariff on Indian imports, citing India’s Russian energy purchases, raising total tariffs to 50%—the highest for any nation. India condemned the move as “unfair, unjustified and unreasonable.” Experts warn it could reduce India’s annual GDP by over 0.5 percentage points.

What’s in Today’s Article?

• Trump’s Reasons for Targeting India with Higher Tariffs
• Impact of Tariffs on Reducing Trade Deficit
• Tariffs as a Tool to Push for a Trade Deal
• Why Retaliatory Tariffs May Backfire for India
• Impact of US Tariffs on Indian Economy and Jobs
• India’s Strategic Response to US Tariffs

Trump’s Reasons for Targeting India with Higher Tariffs

• While officially citing India’s energy imports from Russia, the additional tariffs appear aimed at pressuring India into signing a US-favourable trade deal.
• Trump has long labelled India as one of the most protectionist nations, with high trade and non-trade barriers limiting foreign market access.
• He argues these barriers enable India to maintain a trade surplus with the US, meaning India exports more to the US than it imports.
• Trump’s broader goal is to reduce this trade deficit and establish what he considers balanced trade relations.
  • Trump’s notion is not rooted in promoting free trade but in achieving “balanced trade,” meaning zero trade deficit.
  • However, balanced trade between two countries rarely occurs naturally, as nations typically have deficits with some partners and surpluses with others.
  • What truly matters is avoiding an overall trade deficit that becomes unsustainable, where imports significantly exceed a country’s capacity to pay.

Impact of Tariffs on Reducing Trade Deficit

• A tariff acts as a tax on imported goods, making them costlier for domestic consumers.
• With a 50% tariff on Indian imports, US buyers will find these products significantly more expensive, leading to reduced demand.
• They may switch to cheaper alternatives from other countries or avoid purchasing the product altogether.
• As imports from India decline—while US exports to India remain unchanged—the US trade deficit with India will narrow and could eventually be eliminated.

Tariffs as a Tool to Push for a Trade Deal

• Beyond reducing imports, tariffs are being used to pressure India into a trade deal aimed at eliminating the trade deficit.
• This could be achieved by compelling India to open its domestic markets to more US goods, thereby boosting US exports, or by urging the Indian government and related entities to purchase more American products—such as defence equipment or crude oil—directly contributing to narrowing the deficit.

Why Retaliatory Tariffs May Backfire for India?

• Imposing tariffs on US imports would hurt Indian consumers by raising costs and reducing imports from the US.
• This could widen India’s trade deficit, prompting further US tariffs since Trump’s primary goal is to eliminate the deficit.

Impact of US Tariffs on Indian Economy and Jobs

• While tariffs are imposed between governments, their real effect hits companies and workers by disrupting supply chains.
• Indian exporters, especially in labour-intensive sectors like textiles, carpets, and food products, may lose contracts to competitors in un-tariffed countries, causing job losses and livelihood disruptions.
• The deeper impact lies less in GDP decline and more in employment devastation.
• Overall Economic Exposure
  • Only around 20% of India’s goods exports — about 2% of GDP — are US-bound, limiting the direct macroeconomic hit.
  • However, certain sectors are disproportionately dependent on US trade, making them more vulnerable.
  • Experts estimate that $8 billion worth of exports, including gems and jewellery, apparel, textiles, and chemicals, could be most at risk.
• Sectoral Impact
  • Vulnerable Sectors: Gems and jewellery, textiles, apparel, and chemicals are expected to bear the brunt, potentially prompting targeted government support measures.
  • Less Affected Sectors: IT services are not targeted, shielding much of the equity market. Pharmaceutical exports to the US are also expected to remain unaffected.
  • Excluded Goods: Steel, aluminium (taxed separately), semiconductors, and derived electronic products are exempt. Apple’s large-scale Indian manufacturing is unlikely to be impacted.

India’s Strategic Response to US Tariffs

• In the short term, India must focus on minimising losses through trade negotiations.
• Over the long term, it needs urgent domestic reforms to boost manufacturing, skill development, infrastructure quality, logistics efficiency, and ease of doing business.
• Tax relief, a national human resource policy, and leveraging its young population are essential.
• Global trade rewards strength, and India must address structural weaknesses to avoid economic exploitation and punitive measures.