Reducing India’s Exposure to U.S. Tariff Risks

UPSC Syllabus: Gs Paper 2- International Relations

Introduction

India faces growing U.S. tariff risks due to its Russian crude purchases, strong export dependence on the U.S., and exposure of key sectors such as pharmaceuticals. Existing and proposed U.S. measures can raise trade costs and affect India’s growth. India therefore needs to reduce its vulnerability through market diversification, domestic reforms and better management of its energy and trade interests.

U.S. Tariff Measures Affecting India

1. Lindsey O. Graham Bill: The U.S. Senate passed the Lindsey O. Graham Sanctioning Russia and Iran Act of 2026 by 86–11 votes, increasing economic pressure on Russia.

• 100% Tariff Provision: The Act authorises tariffs of up to 100% on goods from the five largest importers of Russian crude oil or natural gas.
• India’s Exposure: India, the second-largest buyer of Russian crude after China, could face these additional tariffs on its exports to the U.S.
• Implementation: The proposed 100% tariff is not automatic; the bill must become law, after which the U.S. President can decide whether to impose it.
• Other Measures: The Act proposes 500% tariffs on Russian goods, sanctions on Russian officials and financial institutions, and extends the Iran Sanctions Act until 2031.

2. Existing Tariff on India: In August 2025, the U.S. imposed an additional 25% tariff on Indian goods over Russian oil purchases, taking tariffs on some Indian exports to 50%.
3. Section 301 Tariff: On July 24, 2026, the U.S. imposed an additional 10% tariff on India under Section 301 of the Trade Act of 1974, replacing the expired 10% duty under Section 122.
4. Generic Medicine Tariffs: Separately, the U.S. has proposed a 100% tariff on generic medicines from 2028, rising to 200% in 2029 unless firms shift production to America.

Why is India Vulnerable to U.S. Tariffs?

1. Dependence on Russian Crude: Russian crude increased from around 2% of India’s imports before the Russia-Ukraine conflict to nearly half in 2026, making energy purchases a major point of friction.
2. Rapid Import Growth: Russian crude imports almost doubled from 4.54 MMT in January to 8.96 MMT in May 2026, showing the scale of this dependence.
3. Energy Security Needs: Russian oil has helped India secure stable supplies and manage crude import costs, making a sudden reduction in purchases difficult.
4. West Asian Disruptions: The West Asian conflict disrupted shipping and pushed Indian refiners to rely more heavily on Russian crude as an alternative source.
5. Concentration in the U.S. Market: The U.S. is a major destination for Indian exports, leaving Indian producers exposed when American tariff policy changes.
6. Pharmaceutical Dependence: Pharmaceuticals account for about 13% of India’s exports to the U.S., while the U.S. provides around one-third of sales for most major Indian pharmaceutical companies.
7. High Exposure of Some Firms: U.S. sales account for nearly 50% of total sales of Dr. Reddy’s Laboratories and Zydus Life Sciences, making these companies particularly exposed to changes in U.S. trade measures.

Economic Implications of U.S. Tariff Pressure

1. Large Welfare Loss: Under the sanction scenario with a 110% U.S. tariff, India’s welfare falls by nearly $47 billion, while GDP and output also decline.
2. Lower Domestic Demand: The sanction scenario reduces domestic demand, reflecting weaker economic activity under prolonged tariff pressure.
3. Fall in Aggregate Exports: India’s aggregate exports decline by 5.1%, as higher tariffs weaken the competitiveness of Indian products.
4. Fall in Imports: Aggregate imports decline by 5.2%, reflecting weaker economic activity and disrupted trade flows.
5. Pressure on India-U.S. Trade Deal: Continued tariff disputes could increase friction between the two countries and risk progress on the India-U.S. trade deal.
6. Possible Pharma Production Shift: U.S. tariff pressure may encourage Indian pharmaceutical firms to expand production in America, raising concerns about diversion of domestic production.

Way Forward

1. Diversify Export Destinations: India should expand its presence in alternative markets so that changes in U.S. trade policy have a smaller effect on overall exports.
2. Use the India-EU FTA: A functional India-EU FTA can provide an important alternative market and strengthen India’s integration with other economies.
3. Benefits of Diversification: Under the diversification scenario, welfare improves by $26.3 billion, GDP turns positive, output and domestic demand recover by around 1%, while exports rise 3.1%and imports 2.6%.
4. Improve Trade Facilitation and Logistics: Better trade facilitation and logistics can help Indian exporters access alternative markets more efficiently.
5. Reduce Non-Tariff Barriers: Removing non-tariff barriers and improving standards can strengthen access to alternative markets and improve export competitiveness.
6. Move towards Higher-Quality Goods: India should move up the goods quality ladder to strengthen long-term export competitiveness.
7. Balance Energy and Trade Interests: India should protect its energy-security needs while managing the diplomatic and economic costs linked to Russian crude purchases.

Conclusion

India’s exposure to U.S. tariffs reflects the interaction of energy choices, export concentration and sector-specific dependence. The response should therefore combine wider export markets with domestic reforms and strategic energy management. A more diversified and competitive trade base can reduce the impact of future U.S. tariff decisions while strengthening India’s resilience to wider geopolitical shocks.

Question for practice:

Examine the challenges posed by rising U.S. tariff risks to India and the measures needed to reduce its exposure.

Source: The Hindu