India faces economic challenges from new United States tariffs

Source: The post India faces economic challenges from new United States tariffs has been created, based on the article “With tariffs, India’s growth rate needs a careful watch” published in “The Hindu” on 9th August 2025

UPSC Syllabus Topic: GS Paper 2- Effect of policies and politics of developed and developing countries on India’s interests.

Context: The United States has imposed two major trade measures against India: a 25% reciprocal tariff on exports from August 7 and an additional 25% penal levy from August 29 for continuing crude oil imports from Russia. Together, these could reduce India’s exports, weaken growth, and widen the current account deficit (CAD). India faces economic challenges from new United States tariffs

For detailed information on India must respond to American tariff hike with strategy read this article here

India–U.S. Trade Context and Policy Actions

1. India’s Trade Surplus with the U.S.: India had a $41.18 billion merchandise trade surplus with the U.S. in 2024–25, which is rising steadily. The U.S. seeks to narrow this gap by targeting India’s exports and imports.
2. Impact on Crude Imports: The penal levy also acts as a non-tariff barrier on Russian crude, pushing India towards costlier imports from the U.S. or other suppliers, raising import costs.
3. Free Trade Concerns: Such unilateral actions are against free and fair trade principles, showing the use of trade measures as policy enforcement tools.

Impact of Reciprocal Tariffs

1. Effect on Exports and Trade Balance: Assuming import elasticity of -1, India’s exports to the U.S. may fall by 25%. For 2024–25, this could widen the trade deficit by 0.56% of GDP to 7.84%.
2. Effect on GDP Growth: Real GDP growth could fall from 6.5% to 5.9%. The CAD may rise from 0.6% to 1.15%.
3. Impact in 2025–26: Since four months are already over, GDP decline may be about 0.4% and CAD rise proportionately less.

Caveats and Mitigating Factors

1. Ongoing Trade Agreements: A trade deal with the UK and talks with the EU may improve the CAD, though the impact is unquantified.
2. Tariffs on Other Exporters: U.S. tariffs on other countries could reduce competition for Indian exports.
3. Exchange Rate Depreciation: The rupee fell to over ₹87.5 per U.S. dollar after tariff announcements, possibly offsetting some export losses.
4. Residual Impact: Even with these positives, GDP growth may still be 0.5% lower than the base 6.5% forecast, and CAD could widen similarly.

Strategic Policy Responses

1. Negotiation Leverage: India can use ongoing trade talks to negotiate with the U.S., without compromising on sensitive areas like agriculture and MSMEs.
2. Diversifying Exports: Expanding into new markets is essential but difficult in the short term.
3. Lowering Import Tariffs: High import tariffs raise input costs for exporters. Cutting them could improve export competitiveness.

Impact of Penal Levy

1. Economic Impact: The penal levy’s effects are similar to reciprocal tariffs but slightly reduced due to some commodity exemptions. Combined, they could reduce GDP growth by over 0.6 percentage points in 2025–26.
2. Diplomatic Efforts: India should highlight the discriminatory nature of the levy, noting other countries import more from Russia. The three-week negotiation window should be used effectively.
3. Long-Term Risks: Tariffs as policy tools undermine the multilateral trade system. India should work with global partners to restore balanced trade rules.

Question for practice:

Examine the economic implications of recent U.S. trade measures on India’s growth and current account deficit.