US President Donald Trump’s proposed reciprocal tariffs could significantly impact India’s trade strategy, forcing a shift in import-export dynamics, currency valuation, and domestic policy priorities. While India is already increasing purchases of US defence equipment and energy, the broader implications of Trump’s tariff plan extend beyond specific sectors, affecting economic growth and trade deficits.
The US tariff plan
Trump has announced that the US will impose tariffs on imports equivalent to those levied by other countries on American exports. This move overrides decades of World Trade Organization (WTO) agreements that granted developing economies like India preferential treatment, allowing higher tariffs to protect domestic industries. By eliminating these trade carve-outs, the US is pushing for a level playing field where all nations apply the same tariff rates on each other’s goods.
The US trade department is expected to finalize tariff calculations by April, factoring in not only existing duties but also government subsidies provided to exporters. This approach could substantially raise tariffs on goods from countries like India, which offer incentives such as the Production Linked Incentive (PLI) scheme to boost manufacturing and exports.
Impact on India’s trade and rupee
With reciprocal tariffs, India could face higher costs in exporting goods to the US, reducing its competitive advantage in sectors like textiles, pharmaceuticals, and engineering goods. At the same time, Indian imports from the US—ranging from crude oil to motorcycles—could become cheaper, leading to a surge in demand for American products.
A consequence of increased US imports would be a further weakening of the Indian rupee. More dollars would be required to pay for these imports, increasing forex outflows and potentially widening India’s current account deficit. While a weaker rupee could make Indian exports more attractive, the increased tariff burden on these exports could nullify any benefits.
Shift in trade and economic policy
India’s efforts to balance trade with the US may lead to higher purchases of American goods, including defence equipment and energy. This aligns with recent trends but could further challenge India’s push for self-reliance under the Atmanirbhar Bharat initiative. As India aims to become a developed economy by 2047, greater dependence on US imports could create conflicts between economic integration and domestic industrial growth.
The timing of Trump’s tariff announcement also intersects with India’s recent tax breaks aimed at boosting domestic consumption. With higher-income consumers benefiting the most from the relief, there is a possibility that some of this additional spending could be directed toward cheaper US imports instead of stimulating local demand. This could moderate the expected GDP growth impact of domestic consumption stimulus measures.
The Indian electronics industry seeks enhanced trade ties with the US aiming for $750 billion in bilateral trade by 2032, including $100 billion in electronics. They highlight opportunities created by policies like the Production Linked Incentive (PLI) scheme and call for favorable trade concessions and technology partnerships from the US.
Strategic considerations for India
While reciprocal tariffs may make US goods more affordable in India, they could also pressure Indian exporters, particularly in labour-intensive industries, by raising their costs in a key market. India may need to recalibrate its trade strategy, negotiating exemptions or countermeasures to protect critical sectors. The long-term trajectory of India-US economic relations will depend on whether these tariffs remain a negotiating tool or become a permanent shift in trade policy.
As the US moves towards a more protectionist stance, India will have to weigh the benefits of deeper economic engagement against the risks of increased reliance on American imports and the potential erosion of its domestic manufacturing sector.
