Minimal Effect of 25% Trump’s Tariff on Indian Economy

The 25 percent tariff imposed by Donald Trump on Indian exports to the United States is expected to have a 'minimal' effect on the economy. The downturn in GDP is unlikely to surpass 0.2 percent. A 0.2 percent decrease in GDP—amounting to INR 330.68 lakh crore nominal in FY 2024/25—is considered 'manageable.'  Moreover, A 0.2 percent decrease in GDP—amounting to INR 330.68 lakh crore nominal in FY 2024/25—is considered 'manageable. The tariff will not affect more than half of India's exports to the United States. With these tariffs, just roughly USD 48 billion worth of exports would be impacted since the US is excluded from Section 232. The remaining exports will have little effect on a nation with a population of 1.4 billion and a GDP of approximately USD 4 trillion.

Numerous industries would encounter a 25% duty impact, such as electrical and mechanical machinery (roughly USD 9 billion), gems and jewellery (USD 12 billion), shrimp (USD 2.24 billion), textiles and clothing (USD 10.3 billion), leather and footwear (USD 1.18 billion), animal products (USD 2 billion), and chemicals (USD 2.34 billion).

Impact on America

The 25 percent duty on Indian products that Trump declared is projected to have greater economic consequences for the U.S. than for India, as noted by SBI Research in a report released on August 1. The report suggests that the effects of these tariffs could be more harmful to the U.S. economy than to that of India, labelling the implementation of these tariffs as a "poor business choice." Due to higher prices, it is expected that these tariffs will place a significant financial strain on American households, costing them an average of USD 2,400 in the near future. Although their overall financial stability may be less impacted, higher earners may experience a loss of up to USD 5,000, whilst lower-income families may lose around USD 1,300.

However 25% tariff on India matters. The United States remained India's largest trading partner for the fourth consecutive year in 2024-25, with a total bilateral trade of USD 186 billion (USD 86.5 billion in exports and USD 45.3 billion in imports). The US represents approximately 18 percent of India’s total exports, 6.22 percent of imports, and 10.73 percent of bilateral trade. India recorded a trade surplus of USD 41 billion with the US for the fiscal year 2024-25, indicating the difference between imports and exports. In the services sector, India is estimated to have exported USD 28.7 billion while importing USD 25.5 billion, resulting in a surplus of USD 3.2 billion. A Bloomberg report suggests that approximately 10 percent of India's total exports could be impacted from July to September if tariffs surpass 25 percent, which may weaken India's status as a 'safe haven' during a global economic downturn.

How Tariffs Influence

Trade Import duties increase the cost of goods in the country that imports them. This could make Indian products less competitive in the US market. However, the overall effect on Indian enterprises in any specific sector will also depend on how the tariffs imposed on them compare with those on other competing countries. For instance, the duties on competitor countries like Bangladesh (20%), Vietnam (20%), and Thailand (19%) are lower, resulting in cheaper imports from these nations in the US market, which may lead American buyers to shift their preferences to these alternatives. Indian goods that rely on labour, such as clothing, leather and synthetic footwear, gems and jewellery, carpets, and handicrafts, might face the greatest challenges because of this tariff.

To sum up, India needs not worry about imposition 25% tariff because it does not impact India’s bilateral trade with USA. So, Trump's tariff action is as a manoeuvre to force India to accept American conditions.

Prof Mithilesh Kumar Sinha

Department of Economics, Nagaland University, Lumami