Decoding the New US Tariffs on India & Their Economic Impact

The United States has recently introduced a new wave of tariffs on Indian goods, escalating a trade dispute that has significant economic and geopolitical implications. This move, which doubles the tariff rate on a broad range of Indian products, is ostensibly a response to India’s continued purchase of discounted Russian crude oil. However, it signals a deeper shift in US trade policy and poses a formidable challenge to India’s economic growth and export-oriented sectors.

The new tariffs, announced by the Department of Homeland Security, impose an additional 25% duty on Indian products, pushing the overall levy to a formidable 50%. This action, which takes effect on August 27, 2025, builds on a prior 25% reciprocal tariff. The US administration, under President Donald Trump, has framed these measures as necessary to counter “threats to the United States by the government of the Russian Federation” and to pressure India to reduce its oil trade with Moscow, which Washington argues helps fund Russia’s war effort in Ukraine.

Impact:

The immediate economic impact on India is expected to be substantial. The United States is India’s largest export market, accounting for a significant portion of its total merchandise exports. The 50% tariff rate will make Indian goods considerably more expensive and less competitive compared to products from other countries like Vietnam, Bangladesh, and Mexico, which are not subject to the same penalties. Sectors most vulnerable to this tariff hike include labor-intensive industries such as textiles and apparel, gems and jewelry, seafood (especially shrimp), and leather goods. These are sectors that are crucial for employment and are dominated by micro, small, and medium enterprises (MSMEs). Analysts predict a sharp decline in orders from the US, leading to potential layoffs and a broader downturn in these industries.

While some of the tariff costs may be absorbed by Indian exporters through price cuts or by US importers, the overall effect will be a significant hit to India’s export earnings. Think tanks and economists are projecting a potential reduction in India’s GDP growth for the coming fiscal year, with some estimates suggesting a drop of up to 1 percentage point if the tariffs are sustained. The stock market has already reacted negatively, with market veterans sounding alarms about a potential increase in foreign institutional investor (FII) selling.

The Indian government has responded with a mix of defiance and cautious planning. New Delhi has vehemently condemned the tariffs as “unfair, unjustified, and unreasonable,” with Prime Minister Narendra Modi pledging to protect the interests of small entrepreneurs and farmers. Indian officials have maintained that their country’s oil purchases are guided by commercial considerations and a commitment to energy security for its 1.4 billion people, not political alignment. External Affairs Minister S. Jaishankar has also pushed back, stating that trade decisions are based on market realities, not political dictates, and has questioned the double standard of a “pro-business” American administration penalizing India for engaging in business.

The government is also actively considering measures to cushion the impact on affected industries. Instead of a broad-based loan guarantee scheme, officials are looking at targeted, sector-specific measures, such as relaxed credit lines and reduced insurance premiums. These steps, aimed at supporting MSMEs and export-oriented units, are designed to build resilience and help these businesses navigate the challenging new trade landscape.

Final Remarks:

Beyond the immediate economic fallout, the tariffs have significant geopolitical implications. They mark a notable setback in the US-India strategic partnership, which has been growing in recent years as a counterbalance to China. By singling out India for punishment while largely sparing China, which also buys significant amounts of Russian oil, the US risks pushing New Delhi closer to Beijing and Moscow. There have already been reports of a possible diplomatic reset between India and China, with a high-level summit being considered to resolve long-standing border disputes. The tariffs have also created a sense of unreliability among US allies, prompting countries like Brazil, Canada, and Japan to re-evaluate their own trade strategies and look to deepen ties with other nations. In this high-stakes game of economic pressure, the new tariffs are a test of India’s economic resilience and diplomatic resolve. While the country’s large domestic consumption base provides a degree of insulation, the disruption to its export engine is undeniable. The coming months will determine whether this trade friction is a temporary measure to force a negotiation or the beginning of a prolonged period of economic friction between two of the world’s major powers. India’s ability to diversify its export markets, bolster its domestic industries, and continue its diplomatic balancing act will be crucial to its success in navigating this new and challenging chapter in global trade. For any portfolio-specific queries, please reach out to our team of advisors at Moneyfront.