As trade tensions rise between India and the United States, concerns over potential tariff hikes loom large. In the fiscal year 2023-24, bilateral trade between the two nations reached a significant USD 119.71 billion, with India maintaining a trade surplus of about USD 35.31 billion. However, if the US increases tariffs on Indian goods, it could disrupt this positive trade balance, creating challenges for several key Indian industries. India’s response to these challenges will be crucial in mitigating the economic fallout and preserving its trade relations with the US.
India’s Potential Responses to US Tariffs
India is expected to take several strategic steps in response to potential US tariffs, focusing on trade diversification, retaliatory measures, and bolstering domestic industries. These efforts aim to reduce reliance on the US market and safeguard key sectors like pharmaceuticals, textiles, and information technology (IT), which are particularly vulnerable to tariff hikes.
Increasing Imports from the US
India may strategically increase imports from the US. in sectors that could help balance the trade deficit and avoid further tariff escalation. Ajay Sahai, Director General of the Federation of Indian Export Organisations (FIEO), suggests that India should explore a range of imports from the US. to reduce the trade gap and address the concerns of tariffs. Sahai highlights several areas of focus:
• Energy Imports: India’s growing energy demand presents an opportunity to import more Liquefied Natural Gas (LNG) and crude oil from the US. This would not only fulfill India’s energy requirements but also help reduce the bilateral trade deficit, a significant concern for both countries.
• Renewable Energy Equipment: With India’s ambitious renewable energy goals, importing solar panels, wind turbines, and advanced energy storage solutions from the US. could align with India’s green energy initiatives. This would provide a dual benefit of energy security and climate-conscious trade.
• Aerospace and Defense: Sahai also points to the possibility of importing US.-made aircraft, drones, fighter jets, and missile systems. Expanding defense procurement from the US. could strengthen India’s defense capabilities while reducing the trade deficit.
• Semiconductors: India’s electronics sector, which is rapidly growing, could benefit from sourcing semiconductors from the US. to address the global chip shortage and fuel innovation in India’s tech industry.
• Agricultural Products: To meet domestic protein demands, India can increase imports of soybeans and pulses from the US. Additionally, India can expand its intake of dry fruits such as almonds, walnuts, and pistachios, which are already key imports.
• Advanced Medical Equipment: Importing advanced medical devices, biotechnology products, and diagnostic equipment could support India’s healthcare sector, which has seen increased demand due to the COVID-19 pandemic and a growing population.
By diversifying its imports in these sectors, India can not only reduce the trade deficit but also avoid punitive tariffs that could harm Indian exports.
Retaliatory Tariffs
In response to US tariff hikes, India may opt to impose retaliatory tariffs on US. goods, targeting key American exports to India. According to a document prepared by the Indian government, retaliatory tariffs are a standard approach used by India in past trade disputes to signal its opposition to unfair trade practices. India had previously levied retaliatory tariffs on US products such as apples, almonds, and motorcycles in 2019 when the US imposed tariffs on Indian steel and aluminum.
For instance, following the US steel and aluminum tariffs in 2018, India retaliated by imposing duties on 28 US. products, including agricultural items like apples and almonds. This strategy was aimed at minimizing the economic impact on India and pressuring the US to reconsider its trade actions. According to sources , Indian officials have not ruled out the possibility of similar retaliation if US tariffs increase again. These retaliatory steps are a form of pressure to encourage negotiations and discourage unfair tariff practices.
• Agricultural Products: Items such as US. apples, almonds, and soybeans are major exports to India. Imposing higher tariffs on these goods would hit US. exporters, potentially forcing them to the negotiating table.
• Motorcycles and Automotive Parts: US. manufacturers, such as Harley-Davidson, could face increased duties on motorcycles and related components. This would affect US. automakers’ profits and potentially lead to a reduction in exports.
• Other Consumer Goods: India could also consider tariffs on products such as whiskey, aircraft parts, and industrial equipment. A broad-based retaliatory tariff approach would signal India’s willingness to protect its interests in the face of higher duties.
Strengthening Trade with Other Partners
To reduce dependence on the US. market, India could intensify its trade relations with other global partners. Countries in the European Union, ASEAN, and the Middle East are potential markets for Indian exports. Additionally, India could further engage in trade agreements such as the India-UAE Comprehensive Economic Partnership Agreement (CEPA) and the India-EU Free Trade Agreement (FTA), both of which could provide new avenues for Indian businesses.
This diversification strategy would allow India to mitigate the potential losses in exports to the US. while fostering stronger economic ties with other major trading blocs.
Boosting Domestic Manufacturing
India is likely to focus on boosting its own manufacturing capabilities to reduce reliance on foreign imports, particularly from the US. The Production-Linked Incentive (PLI) Scheme, aimed at incentivizing domestic production in key sectors such as electronics, pharmaceuticals, and textiles, could be expanded.
By focusing on self-reliance, India could shield its economy from external shocks and foster sustainable growth.
Ajay Sahai’s Take on India’s Strategy
Ajay Sahai emphasizes that while India is vulnerable to the impact of higher US. tariffs, there are multiple avenues for mitigating the damage. Sahai suggests that India can strategically increase imports from the US. in sectors that not only serve domestic needs but also contribute to reducing the trade deficit. The goal is to “purchase a range of goods from the United States to help reduce the trade deficit, which has crossed US$ 50 billion, and avoid tariffs,” he notes.
Sahai specifically points to sectors such as energy, defense, technology, and agriculture where India can increase its reliance on US imports. This approach not only helps balance trade but also enhances bilateral ties between the two nations.
The Potential Impact of US. Tariffs on India
If the US. imposes higher tariffs on Indian goods, the economic repercussions for India could be severe, with impacts felt across various sectors.
Impact on Exports
Key sectors like IT services, textiles, pharmaceuticals, and automobiles could face significant setbacks. India’s IT industry, which accounts for over 80% of its IT export earnings from the US may see reduced demand if tariffs negatively impact US demand for outsourcing.
India’s textile industry, which is one of the largest exporters of garments to the US., could become less competitive as Indian goods face higher costs due to tariffs. The pharmaceutical sector could also be adversely affected, with US. consumers paying higher prices for generic drugs from India, potentially reducing demand.
Impact on Employment
Industries such as textiles, manufacturing, and IT, which provide millions of jobs, could experience significant layoffs. The economic disruption caused by reduced exports would lead to a slowdown in production and job losses across various sectors.
Impact on the Indian Economy
A reduction in exports to the US. could widen India’s Current Account Deficit (CAD), as the US. is a key market for Indian goods. A widening CAD, combined with a potential depreciation of the Indian Rupee, could strain India’s economic stability.
Moreover, Indian stock markets could experience volatility, particularly in sectors reliant on US. exports, such as IT, pharma, and textiles. Investors may become wary, leading to declines in stock prices and affecting investor sentiment.