In a decisive move that echoes the protectionist stance of his first term, US President Donald Trump last week slapped widespread trade tariffs on imports from strategic trade allies. Among the primary targets, India was imposed a flat 26 per cent duty on all goods being exported to the US, which sparked unease within the country’s export-centric sectors and industries, particularly the micro, small and medium enterprises.
Shifting trade dynamics
The US has been a key export market for India. With the bilateral trade between the two countries estimated at $129 billion in 2024 and India’s export to the US reaching $87 billion, any trade turbulence on this scale may appear challenging. But while tariffs dominate the headlines, beneath the surface lies a story of resilience, adaptability, and shifting trade dynamics.
Over the past decade, trade between the US and India has consistently grown backed by expansion in MSME-heavy sectors including electronics, gems and jewellery, apparel, pharmaceuticals, and engineering goods. The US currently accounts for reportedly close to 18 per cent of India’s overall exports.
When Trump returned to the Oval Office this time, it signalled continued diplomatic cooperation with India and aligned strategic interests. But instead, Trump’s attention shifted to a renewed “America First” agenda with trade tariffs to bolster local industry.
Against that backdrop, let’s take a closer look at what the tariffs might mean for MSME-dominated industries, and if the impact will be felt in the near term, over the medium term, or well into the future.
Gems and jewellery: First in the line of fire
With around 10 lakh units, 90 per cent of which are MSMEs, the most immediate and probably the hardest hit would be the gems and jewellery sector. In FY24, the US had a share of close to $10 billion or 30 per cent of India’s $32 billion gems and jewellery exports.
The weighted average US tariff on its import of gems and jewellery from India has been increased from 3.17 per cent to 26 per cent. Considering gems and jewellery is a discretionary item for purchase, high tariffs may hurt both demand and pricing, particularly in the polished diamond segment as it is already facing intense competition from lab-grown diamonds.
This could translate into a substantial decline in demand and a concern, especially for smaller exporters. In the medium to long term, tariffs may also force exporters to redirect shipments via transit hubs such as Dubai, thus increasing their costs.
“While the tariff’s application to competing nations presents both challenges and opportunities, it is likely to significantly impact India’s diamond and jewellery sector—a cornerstone of its exports to the US,” said Gem and Jewellery Export Promotion Council (GJEPC).
“In the long term, we foresee a reshaping of global supply chains. In the short run, we anticipate challenges in sustaining India’s current export volume of $10 billion to the US market,” said GJEPC in a statement, urging the government to accelerate the work on the bilateral trade agreement between India and the US to navigate the tariff issues.
Textile and apparel: Relative advantage
In the textile and apparel sector, Indian MSME exporters are expected to have a relative advantage as the reciprocal tariffs by the US on other major textile exporters to the US, such as China, Vietnam, and Bangladesh, are higher in comparison to tariffs imposed on India.
For the uninitiated, the tariffs on China have been increased to 54 per cent, while 46 per cent and 37 per cent duty is levied on imports from Vietnam and Bangladesh, respectively. This may help Indian exporters with better volumes and revenue.
Moreover, since the majority of India’s exports are cotton-based garments and home textile products, India’s self-sufficiency in cotton production should enable it to largely pass on higher reciprocal tariffs, according to credit rating agency CareEdge Ratings.
“India has a golden opportunity to expand its footprint in the US market, especially in light of recent US policy shifts increasing tariffs on key competitors like China, Mexico, and Canada,” Chandrima Chatterjee, Secretary General, Confederation of Indian Textile Industry (CITI) told FE recently.
“With reduced tariffs, India’s textile and apparel exports to the US could surge to $16 billion within the next three years from $10.8 billion in 2024,” she added.
Pharma: Safe for now
The impact of tariffs on MSMEs in pharma is also likely to be limited as critical generic drug exports are exempted. Currently, out of around 10,500 pharma units in the country, approximately 8,500 are MSMEs, as per the government data.
A large number of MSME units are into manufacturing generic tablets, capsules, syrups, ointments and injectables, working as third-party manufacturers for large pharma companies.
Importantly, the exemption in pharma is for now and the US might levy sector-specific tariffs as signalled by Trump last week. “Pharma (tariffs) is going to be starting to come in, I think, at a level that you haven’t really seen before,” Trump told reporters aboard Air Force One, according to a Reuters report.
However, experts believe that any levy of tariffs on pharma, particularly for generics, by the US is unlikely to be sustained as it may hurt MSMEs’ price competitiveness and shrink their export margins, which may increase the healthcare costs in the US.
Also, “if pharma tariffs are applicable for all countries, Indian pharma companies could have an edge given their cost advantage and could very well be the last ones standing,” said a report by Kotak Institutional Equities on Monday.
Electronics: Better positioned
Coming to the electronics sector also, where MSMEs account for 25-30 per cent of the sector’s component consumption, the impact of Trump’s tariffs is likely to be restricted and temporary. In fact, India stands to gain as higher tariffs hit China, Vietnam, Taiwan, and Thailand, according to the India Electronics and Semiconductor Association (IESA).
“India is better positioned in electronics system design and manufacturing, with a growing electronics manufacturing base and adaptable trade strategy. Negotiating a bilateral trade agreement (BTA) could ease the pressure, while strategic tariff adjustments on the US imports could help address concerns and create a balanced trade equation,” said Ashok Chandak, President, IESA.
The US exports to India in electronics and electricals to India is around $1 billion, in contrast to India’s exports to the US worth around $12 billion with key items including mobiles, medical, industrial and consumer electronics, and IT hardware.
MSMEs in the electronics and components market are largely involved in making printed circuit boards (PCBs), wiring harnesses and connectors, transformers and inductors, etc., that play a critical role in consumer electronics, industrial systems, and telecom equipment.
Overall, experts believed that the protectionist tariffs may act as a catalyst for Indian MSMEs in a number of sectors to benefit from global supply chain restructuring.
“We have to assess the impact, but looking at the reciprocal tariffs imposed on other countries, we are in a lower band. We are much better placed compared to our key competitors such as Vietnam, China, Indonesia, Myanmar, etc. We will definitely be affected by the tariffs, but we are much better placed than many others,” Ajay Sahai, Director General and CEO of exporters body FIEO told PTI last week.
Defining moment for MSMEs
In contrast to the US-China trade tensions, which opened doors for India earlier, this time India is also finding itself subject to the effects of Trump’s America First policy. However, New Delhi is unlikely to respond with reciprocal duties, according to a Reuters report on April 06. Instead, it is focusing on striking a bilateral trade deal that addresses the trade concerns of both countries.
As trade tensions give way to market realities, India’s MSMEs, which have a 45 per cent share in India’s exports to the world, now find themselves at a defining moment — encountering near-term setbacks with an eye on strategic long-term shifts. For this, they must be willing to pivot as per market needs while the government, on its part, should look at offering supportive measures, if required, and focus on swift trade dialogue with the US to avoid potential fallout.