US tariff hike of 25% poised to trim Indian economic growth by 0.2%

The administration of President Donald Trump in the United States on Wednesday imposed a 25 percent reciprocal tariff on imports of merchandise goods from India, along with differential duties on several other countries—some facing higher rates and others lower. Effective August 1, President Trump also announced undisclosed penalties on India, which could go up to 100 percent, for purchasing crude oil from Russia. The move is aimed at crippling the Russian economy in response to Moscow’s ongoing war in Ukraine, now over three and a half years old.

In a post on Truth Social, President Trump stated, “Remember, while India is our friend, we have, over the years, done relatively little business with them because their tariffs are far too high—among the highest in the world—and they have the most strenuous and obnoxious non-monetary trade barriers of any country. Also, they have always bought a vast majority of their military equipment from Russia and are Russia's largest energy buyer, along with China, at a time when everyone wants Russia to stop the killing in Ukraine – All things not good!”

Trump further announced that India would be required to pay a penalty in addition to the 25 percent tariff. “India will therefore be paying a tariff of 25 percent, plus a penalty for the above, starting on August 1. Thank you for your attention to this matter. MAGA (Make America Great Again)!” the post added.

Madan Sabnavis, Chief Economist at Bank of Baroda, commented, “The penalty component is still unclear, but the 25 percent tariff is not significantly different from the 26 percent rate announced in April. We are still in the discussion phase. While the 25 percent rate is set to take effect from August 1, there appears to be room for negotiation. Our estimate of a potential GDP impact was 0.2 percent when the 26 percent rate was initially announced, and we continue to stand by that number. This is why our forecast ranged between 6.4 to 6.6 percent, with the lower end reflecting the impact of the tariff. The macroeconomic fundamentals will be bruised, though not dented, as the growth story remains firm and stable.”

‘Dead Indian and Russian economies’
US President Donald Trump referred to Russia and India as “dead” economies, stating, “I don’t care what India does with Russia. They can take their dead economies down together, for all I care. We have done very little business with India—their tariffs are too high, among the highest in the world. Likewise, Russia and the USA do almost no business together. Let’s keep it that way, and tell Dmitry Medvedev, the failed former President of Russia, who thinks he’s still President, to watch his words. He’s entering very dangerous territory.”

India currently meets approximately 40 percent of its annual crude oil requirement—about 5.2 million barrels per day (bpd)—primarily through discounted purchases from Russia. Alongside India, China is another major buyer of Russian crude. An analysis by JP Morgan suggests that both China and India are unlikely to comply with US sanctions, potentially affecting up to 2.3 million bpd of Russian oil exports.

Bilateral trades
U.S. total goods trade with India was estimated at US$ 129.2 billion in 2024. U.S. goods exports to India stood at US$ 41.8 billion, up 3.4 percent (US$ 1.4 billion) from 2023. U.S. goods imports from India totaled US$ 87.4 billion in 2024, reflecting a 4.5 percent increase (US$ 3.7 billion) over the previous year. Consequently, the U.S. goods trade deficit with India widened to US$ 45.7 billion in 2024, a 5.4 percent rise (US$ 2.4 billion) from 2023.

India and Russia have shared a long-standing relationship, with bilateral trade and investment ties dating back to the Soviet era. Over the years, the two countries have significantly strengthened their economic cooperation, with bilateral trade reaching unprecedented levels. In the post-Soviet era, trade relations continued to grow, with bilateral trade rising from US$ 1.4 billion in 1995 to US$ 68.7 billion in the financial year 2024–25.

Investment ties between the two nations have also deepened. Indian companies have invested in Russia’s oil and gas, pharmaceuticals, and IT sectors, while Russian companies have invested in India’s energy, infrastructure, and manufacturing sectors. Bilateral trade between India and Russia reached a record high—nearly 5.8 times the pre-pandemic trade volume of US$ 10.1 billion. This includes Indian exports worth US$ 4.88 billion and imports from Russia totalling US$ 63.84 billion.

Trade reactions
Rajani Sinha, Chief Economist at Care Ratings Ltd, stated, “The relative tariff advantage India held under the April round of announcements has now reversed, with India facing higher tariffs compared to several of its Asian peers such as Vietnam (20 percent), Indonesia (19 percent), the Philippines (19 percent), and South Korea (15 percent). Factoring in the higher reciprocal tariffs and the additional penalty on India’s exports to the US, we estimate the potential impact on India’s GDP to be around 0.3–0.4 percent. However, India’s domestically driven economy and relatively lower goods exports to the US—at around 2 percent of GDP—should offer some resilience.”

Industry body Federation of Indian Chambers of Commerce and Industry (FICCI) expressed hope that this is a "temporary phenomenon" and that the two nations will secure a permanent trade deal soon. “While this move is unfortunate and will have a clear bearing on our exports, we hope that this imposition of higher tariffs will be short-lived and that a permanent trade deal between the two sides will be finalised soon,” FICCI President Harsha Vardhan Agarwal said.

Agarwal further added, “There is a lot our two countries can achieve together, and FICCI is confident that, following the detailed deliberations currently underway, we will see beneficial outcomes for both countries when the contours of the final trade agreement emerge. India has been actively negotiating a Bilateral Trade Agreement (BTA) with the US since the start of the year. We understand there were specific demands from the US side that were not in India’s national interest, and therefore, the Indian government has not conceded to those demands.”

Premier textile industry body, the Confederation of Indian Textile Industry (CITI), termed the tariff hike as “very challenging” for the Indian textile sector. “However, CITI remains hopeful that the tariff issue will be resolved once the proposed Bilateral Trade Agreement between India and the United States is in place. Notably, the US is India's largest market for textile and apparel exports. During January–May 2025, US imports of textiles and apparel from India were valued at US$ 4.59 billion—a rise of more than 13 percent compared to the same period last year, when the figure stood at US$ 4.05 billion.”

Hemant Jain, President of PHDCCI, acknowledged the short-term challenges but also saw opportunity. “While Indian MSMEs are momentarily impacted, this is also an opportunity. With global buyers looking to de-risk from overdependence on select geographies, India is emerging as the most credible, democratic, and scalable alternative,” he said, adding that this is the time for Indian industry to step up with quality, compliance, and competitiveness.

Rahul Mehta, Chief Mentor of the Clothing Manufacturers Association of India, noted that if the proposed terms take effect, “it will make our products 7–10 percent more expensive than some of our competitors, and it will certainly hurt our apparel exports to the US.” “Fortunately, this setback has come at a time when we have just signed an FTA with the UK and are proceeding rapidly with an FTA with the EU. So yes, these are tough times—but not beyond our ability to face,” he added.


DILIP KUMAR JHA
Editor
dilip.jha@polymerupdate.com