India must widen, and deepen, its export pool to offset US tariffs

UPSC Syllabus Topic: GS Paper 2 –Bilateral, regional and global groupings and agreements involving India and/or affecting India’s interests. .

Introduction

India’s trade data for December 2025 shows that export growth has slowed at a time when imports remain high. This change has gained importance after the United States imposed a 50% tariff on Indian goods from August 2025. While headline export numbers appear stable, deeper trends reveal weakening momentum, rising trade imbalance, and limited market diversification, raising concerns for India’s external trade stability.

India’s Recent Trade Performance

1. Slow growth in exports: India exported goods worth $38.5 billion in December 2025, compared to $37.8 billion in December 2024. This reflects a modest 1.8% annual growth, showing limited expansion in external demand.
2. Sharp rise in imports: Goods imports stood at $63.55 billion in December 2025. This was nearly 9% higher than imports in December 2024, indicating strong import dependence.
3. Widening trade deficit: The large gap between exports and imports resulted in a trade deficit of $25 billion. This level of deficit increases vulnerability to external shocks.

Emerging Export Trends in the Post-Tariff Period

1. Sequential momentum has weakened

Slow growth: Month-on-month export growth slowed sharply after the tariff hike. Sequential momentum declined from an average of 0.7% during January–July 2025 to just 0.1% during August–December 2025, after adjusting for seasonal variation.

Sector-wide export slowdown: The weakening trend was visible across major sectors. Growth slowed in electronics, engineering goods, petroleum, and textiles, while exports of pharma, chemicals, and gems and jewellery declined on a sequential basis.

2. India’s exports to the US fell: Exports to the US declined both annually and sequentially after the tariffs. Average sequential growth dropped from 1.9% before August to –1.4% between August and December 2025, reflecting reduced competitiveness due to higher prices.
3. Marginal rise in exports to China: Exports to China recorded a small increase of about $2 billion per month. However, this gain was insufficient to compensate for the around $7 billion monthly decline in exports to the US.
4. Exports to the rest of the world remained flat: Exports to countries other than the US and China showed no meaningful growth. This indicates limited diversification and weak alternative demand during the tariff period.

Major Concerns

1. Pressure on the rupee: Lower export earnings reduce demand for the rupee. This places downward pressure on the exchange rate and adds to external sector stress.
2. Loss of competitiveness for exporters: Indian exporters are unable to absorb the full cost of US tariffs. Higher prices reduce competitiveness and lower bilateral trade volumes.
3. Breakdown of trade predictability: Unpredictable tariffs weaken confidence among businesses and policymakers. Such uncertainty moves trade away from rules-based systems toward fragmented trading blocs.
4. Sectoral exposure to tariffs: The tariffs affect electronics, machinery, textiles, gems and jewellery, and auto components. Only pharmaceuticals and energy products remain exempt at present.
5. Impact on MSMEs and investment sentiment: Export-linked MSMEs face immediate pressure. Some multinational firms may reassess short-term plans, though long-term investment decisions remain largely unchanged.
6. Tariffs driven by US domestic economic pressures: The US faces a worsening fiscal position, a persistent trade deficit, and a rising debt-to-GDP ratio. It is using bilateral tariffs to seek favourable trade terms, but this approach raises input costs, pushes consumer prices higher, and has begun feeding into inflation, as acknowledged by the US Federal Reserve.

India’s Way Forward

1. Reducing dependence on a single market: India cannot remain exposed to policy shifts in one country. Export concentration in the US increases vulnerability during trade disruptions.
2. Expanding markets in the Global South: Broadening exports across the Global South is essential. Engagement with 32 countries under Operation Sindoor must be followed by deeper trade integration.
3. Strengthening domestic demand as support: Rising rural incomes are creating new demand for goods. Redirecting export capacity toward domestic markets can help absorb external shocks.
4. Balanced trade strategy: India must defend employment and growth without moving toward protectionism. Diversification, market expansion, and risk reduction offer more stable long-term solutions.

Conclusion

The US tariff hike has weakened India’s export momentum and exposed the risks of limited market diversification. While the immediate impact is visible through slower growth and a widening trade deficit, the long-term damage can be contained. By widening export destinations, deepening trade partnerships beyond the US, and strengthening domestic demand, India can protect its growth path and build a more resilient export ecosystem.

Source – Indian Express