The recent imposition of a 25 per cent tariff by the US President Donald Trump on Indian goods, with added penalties linked to India’s crude and defense dealings with Russia, represents a significant headwind for India’s export-driven sectors. According to ICRA, the tariff can potentially weaken India’s position as a preferred sourcing destination, particularly in sectors like textiles, cut and polished diamonds (CPD), tyres, metals, and auto components

Electronics, gems and jewelry, pharmaceuticals and nuclear reactor & machinery account for 49 per cent of India’s exports to the US. The earlier tariff imposed by the US on such articles varied from 0 per cent (on diamonds, smartphones, pharma products among others) to maximum 10.8 per cent (other bed linen of cotton). Now all of them will face 25 per cent tariff.

Sectors like pharmaceuticals and petroleum products had been exempted from the reciprocal tariff in April 2025, and with the exemption likely to persist, there will be limited impact on these sectors. For some sectors like telecom instruments, ICRA said, while the tariffs on other competing nations like Taiwan, Thailand, Vietnam, etc. are slightly lower vis-à-vis India, the impact of these tariffs is unlikely to be material on this segment. 

The US tariff, effective August 7, will not only elevate India’s trade friction with the US to historic levels, but will also place Indian exports at a disadvantage considering the levy is higher than other Asian countries. The US tariff on India is at 25 per cent while Asian peers such as Vietnam (20 per cent), Indonesia (19 per cent), and Japan (15 per cent) are at an advantageous position. 

This is not all. The US president has also threatened India over its purchase of Russian oil and has said that he will substantially raise tariffs on goods from India. In a post on Truth Social, Donald Trump said, “India is not only buying massive amounts of Russian Oil, they are then, for much of the Oil purchased, selling it on the Open Market for big profits.”

“…Because of this, I will be substantially raising the Tariff paid by India to the USA,” he added while he did not specify the tariff level he had in mind.

Economic implications of tariff on India vs US

Overall, according to ICRA, this proposed higher-than-expected tariff (and the potential penalty on account of India’s crude/defence purchases from Russia) is likely to pose a headwind to India’s GDP growthGDP growth in the ongoing fiscal. “We have lowered our growth forecast for India for FY26 by 20 bps to 6.0 per cent; the extent of the said penalties could result in a further downside,” it said.

SBI Research also maintained that the tariff is expected to impact India’s GDP growth by 25 to 30 bps for FY26.

Furthermore, the economic implications for the current trade stalemate, SBI Research said, will be worse for the US as compared to India with a lower GDP and higher inflation and a weaker dollar. “…in the absence of supply chain re-optimization or domestic substitution, the tariffs could push US inflation up by 2.4 per cent. In the long run, when economic actors have had time to adjust to the new trade regime, the tariffs are expected to add 1.2 per cent to baseline inflation,” it added. 

Impact of US tariff on India’s major export sectors

Let’s examine how the changes in levies are rippling through major export sectors:

Textiles and Apparel: The textiles and apparel sector faces a pronounced challenge with the US, India’s largest market for garments and home textiles (33 per cent and 59 per cent of the sectors’ exports, respectively), will now impose a 25 per cent tariff on Indian goods. Asian countries, namely Vietnam, China, Bangladesh, India, Indonesia, Cambodia and Pakistan, collectively represent 70 per cent of apparel imports by the US. 

The India tariff is 5-6 percentage points higher than on Vietnamese, Bangladeshi, and Indonesian exports. “The recent imposition of tariffs (and penalties) by the US is likely to disrupt the supply chain and have an impact on volumes and profit margins of Indian apparel exporters in the near term,” ICRA said. The recent India-UK trade deal may boost trade with the UK, but any major impact will take time, as customers need time to approve and adapt to the changes, it added. 

Pharmaceuticals: Indian pharmaceutical companies have a strong presence in the US. In FY25, ICRA’s sample set companies witnessed 9.9 per cent YoY revenue growth from the US market with FY24 being a year of strong growth (18.3 per cent YoY increase for ICRA’s sample set). While the US government has held off applying the new tariffs broadly to pharma—citing its own reliance on Indian generics—a policy reversal or additional penalties, SBI Research said, could hit earnings of pharma companies by 2-8 per cent in FY26. “Further, tariff will reduce competitiveness in the world’s largest pharma market and profit margin pressure due to inability to pass on costs,” it added. 

Gems, Jewellery, and Cut & Polished Diamonds: India is the global hub for diamond cutting and polishing, with US and China being the primary destinations for India’s polished diamond exports. According to details shared by ICRA, of the total CPD exports in FY2025, 36 per cent was directly exported to the US. The 25 per cent US tariff shall adversely impact the overall quantum of direct Indian CPD exports to the US. In case these elevated tariffs continue for long, ICRA added, Indian diamantaires may shift exports to trading hubs like Dubai, Belgium, Israel to re-route to the US. 

Auto Components: Of India’s auto component exports accounting for around 30 per cent of the industry revenues, 27 per cent goes to the US. Accordingly, ICRA said, around 8 per cent of the Indian auto-component production will be impacted by the tariffs announced. “Exporters dependent on the US are trying to diversify their revenue base across other geographies (including Asia). Measures to improve value addition, diversification into non-auto segments and cost-optimisation strategies are also being worked upon to reduce the margin impact for US-dependent exporters, in addition to negotiations with supply chain partners,” ICRA said.

Chemicals and Agrochemicals: Indian chemical and agrochemical exports have long benefited from a cost advantage, but the new tariffs compress that margin, particularly as China faces only a slightly higher tariff (30 per cent). European suppliers, now operating at just a 15 per cent US tariff, stand to gain at India’s expense. Of the 60 per cent exports, the US accounts for 18 per cent of the share for the sector. ICRA said that the moderation in tariff differential with China and lower tariffs on EU will marginally impact the competitive position of Indian chemical players

Petroleum Products: Petroleum product exports make up around 6-8 per cent of India’s US-bound goods and have so far largely escaped additional tariffs. However, a shift away from the modestly discounted Russian crude would have some negative impact on this sector.

Metals and Steel: India exports relatively small quantities of finished steel and aluminum to the US, but the indirect effects of a broader tariff war—such as global price pressure and redirected cargo from other Asian economies—may compress margins and raise competitive intensity.

To conclude…

While India may lean on alternative trade partnerships such as the UK to mitigate losses that might incur from the US tariff, the near-term outlook for export-heavy sectors remains cautious. Further penalties linked to Russian crude purchases could amplify the pressure. Much will depend on diplomatic negotiations and whether the US administration escalates or recalibrates its stance post-November elections.