Context

• Recent trade measures by the United States have created significant headwinds for India’s economic growth and external account stability.
• Effective August 7, the U.S. imposed a 25% reciprocal tariff on Indian exports.
• This was followed by a penal levy, an additional 25% tariff, announced on August 6, to take effect from August 29, 2025, in response to India’s continued crude oil imports from Russia.
• These developments carry far-reaching consequences for India’s trade balance, current account deficit (CAD), GDP growth, and strategic trade positioning.

India–U.S. Trade Dynamics

• India enjoys a merchandise trade surplus with the United States, amounting to $41.18 billion in 2024–25, a figure that has been growing steadily.
• The U.S. appears to be targeting both sides of the trade equation, India’s exports and its crude oil import sources.
• The reciprocal tariff directly challenges India’s export competitiveness, while the penal levy operates not only as an export deterrent but also as a non-tariff barrier, designed to push India away from Russian crude towards higher-cost imports, possibly from the U.S. itself.
• Such unilateral measures undermine the principles of free and fair trade, introducing strategic pressure that extends beyond economics into geopolitical alignment.

Impact of the Reciprocal Tariffs

• Export Decline Estimate: Assuming an import elasticity of –1, India’s exports to the U.S. could decline by 25%, a substantial contraction.
• Trade Deficit Effect: In 2024–25 terms, this would widen the trade deficit by 0.56% of GDP, pushing it to 7.84%.
• GDP Growth Impact: The growth rate could drop by 0.6 percentage points, from 6.5% to 5.9%.
• Current Account Deficit: CAD could rise from 0.6% to 1.15%. For 2025–26, given that four months have already elapsed before implementation, the GDP impact might be –0.4%, with a correspondingly smaller CAD increase.

Mitigating Factors and Caveats

• New Trade Agreements: India’s trade deal with the United Kingdom, along with ongoing negotiations with the European Union and other partners, may partially offset export losses.
• Competitor Tariffs: U.S. tariff hikes on other exporting nations could shift some demand back to Indian products.
• Exchange Rate Adjustment: The rupee’s depreciation to around ₹87.5 per U.S. dollar could enhance export competitiveness.
• However, even after considering these buffers, India’s GDP growth in 2025–26 is expected to be 0.5% lower than the base forecast, and the CAD could widen by a similar margin.
• A forced shift from Russian to U.S. crude imports could further strain the CAD, weaken the rupee, and fuel inflation, especially if global oil prices rise.

Policy Options for India

• Negotiation with the U.S.: The current trade deal is not finalised, providing an opportunity to seek compromise while safeguarding sensitive sectors such as agriculture, allied industries, and MSMEs.
• Export Market Diversification: While challenging in the short term, expanding into alternative markets remains a long-term necessity.
• Additionally, domestic tariff reform could boost export competitiveness. Empirical evidence shows that India’s own import tariffs negatively affect exports, with an estimated elasticity worse than –1.
• Reducing tariffs on inputs that feed into export production could strengthen manufacturing and trade resilience.

Impact of the Penal Levy

• The penal levy, another 25% tariff, mirrors the economic impact of the reciprocal tariff but is partially softened by commodity exemptions.
• Combined, the two measures could cut over 0.6 percentage points from the current year’s projected growth.
• India views the penalty as discriminatory, noting that many other countries import more from Russia without facing such sanctions.
• The three-week window before the levy takes effect represents a critical period for diplomatic engagement.

Conclusion

• The imposition of reciprocal tariffs and penal levies reflects the use of trade policy as a coercive geopolitical tool.
• While India may manage the immediate growth slowdown through negotiations, currency adjustment, and new trade partnerships, the persistence of such measures threatens the stability of the global trade system.
• A coordinated effort with other nations to restore a rules-based, non-discriminatory trading environment is essential.
• In the meantime, India must act decisively to defend its trade interests, strengthen its export base, and minimise dependency on any single market or energy source.