With Tariffs, India’s Growth Rate Needs a Careful Watch

Context

Recent U.S. Actions
- 25% reciprocal tariffs on India’s exports (effective: 7 Aug 2025).
- Additional 25% penal levy (effective: 29 Aug 2025) for continuing crude imports from Russia.
Objective: Narrow U.S. trade deficit with India; exert policy pressure on Russian oil imports.

India–U.S. Trade Snapshot (2024–25)

Trade surplus with U.S.: USD 41.18 bn.
India exports more to U.S. than imports.

Impact of Reciprocal Tariffs

Assumption: Import elasticity w.r.t tariffs = –1.
Possible 25% fall in India’s exports to U.S..
Trade deficit: Could widen by ~0.56% of GDP to 7.84%.
GDP growth: Could fall from 6.5% to 5.9% (~0.6 percentage points).
Current Account Deficit (CAD): Could rise from 0.6% to 1.15% of GDP.
For 2025–26 (only 8 months left in FY): GDP loss ~0.4%; CAD impact proportionately smaller.

Factors Moderating the Impact

Trade agreements
- CEPA with U.K. signed.
- Negotiations with EU & other countries underway.
Rupee depreciation (~₹87.5/USD after tariffs) may support exports.
Tariffs on competitor countries may benefit Indian exporters.

Medium-term Risks

Even after accounting for mitigating factors, GDP growth could be 0.5% below baseline in coming years.
CAD could widen similarly.
Penal levy could add further strain.
Shift from Russian crude to U.S. oil → higher import cost → CAD, inflationary pressures.
Rising global oil prices & global economic uncertainty add to risks.

Impact of Penal Levy

Similar in nature to reciprocal tariffs, but exemptions for some commodities.
Together with reciprocal tariffs → total GDP growth loss over 0.6 percentage points from baseline.
Highly discriminatory — other countries import more Russian oil than India.

Policy Recommendations

Negotiation with U.S. before trade deal finalisation — avoid compromise on agriculture, MSMEs.
Diversify export markets — though difficult in short term.
Reduce own import tariffs that hurt exports (due to high import content in exports).
Build coalitions with other nations to counter coercive trade measures.

Conclusion

The U.S.’s reciprocal and penal tariffs mark a shift towards using trade as a tool for geopolitical leverage, undermining the principles of free and fair trade. While India can cushion the immediate blow through diplomacy, market diversification, tariff rationalisation, and currency adjustments, the larger challenge lies in reshaping global trade norms to prevent the normalisation of such coercive measures. A proactive, coalition-based approach will be essential to safeguard both India’s economic stability and its strategic autonomy.