By Ashok Gulati
US President Donald Trump has delivered a strong blow to India by imposing 25% tariff along with some unspecified penalty on exports of most Indian goods. This may hit the overall GDP growth by 20-30 basis points, according to many experts. That means the overall GDP growth in FY26 may not reach 6.5% as expected by the Reserve Bank of India, but may end up somewhere around 6.2-6.3%. This is a significant loss, but not too big for India to endure.
More damaging is Trump’s social media post saying “I don’t care what India does with Russia. They can take their dead economies down together, for all I care”. Is India a dead economy really? India’s economy is growing at more than 6% against the US growth rate of less than 2%. India is still the fastest-growing large economy in the G20 group. Yes, the size of Indian economy (about $4.19 trillion) is way below that of the US which is touching $30 trillion. But in purchasing power parity terms, we are at more than $16 trillion and already the third-largest economy.
Tariffs, trade ties and soft targets
A few things are clear from what has happened on the tariff front. First, the Trump-Modi bonhomie (Howdy Modi) seems to be over. Investing in personal ties does not mean much to Trump. He is transactional and focused on extracting as much from other countries as possible for his Make America Great Again (MAGA) dream. Second, he is very upset with Russian President Vladimir Putin as he is not heeding Trump’s sermons to end the war with Ukraine, which Trump had promise to accomplish within 24 hours of assuming office. Now, he wants to punish those who are trading with Russia, especially for energy and defence needs. India is a soft target. Third, given what he has done to other countries to strike trade deals, including allies like the European Union (EU), Canada, and Japan, it is clear that most of them are disillusioned to say the least. Fourth, by announcing tariffs for each country separately, even for the same products, he has literally buried the multilateral rules of the World Trade Organization, especially the most-favoured nation clause. And finally, he does not like BRICS (Brazil, Russia, India, China, and South Africa), as he sees the grouping as a threat to the US dollar’s dominance in global trade. So, all BRICS countries are on his target list.
Navigating tariffs and trade-offs
How does one now navigate the challenge of Trump’s high tariffs? There are many options for India. Should it retaliate by imposing high tariffs on US goods? Our tariff levels are already quite high, especially in agriculture (about 67%). No wonder Trump keeps calling India the “tariff king”. So, the option of retaliation is not going to pay much. Prime Minister Narendra Modi has to look for better ways and convert this adversity into an opportunity. For that, we need to diversify our exports to other countries.
India’s total goods exports in 2024 were $442 billion, of which $80.7 billion (roughly 18%) went to the US. A 25% tariff will surely have an adverse impact. How much of a hit will the exports take depends on the tariff rates imposed on competing countries for each commodity. If PM Modi focuses on diversifying exports to other countries, the impact of US tariffs can be minimised. Another thing to keep in mind is that our services exports were valued at $336 billion in 2024, of which only 14% ($47.5 billion) went to the US. So far, Trump hasn’t targeted services. But within goods, our top-most exports have been gems and jewellery (about $8 billion), pharmaceuticals (almost $7.7 billion), smartphones ($7.1 billion), and so on. Even frozen shrimps and prawns (marine products) account for $2.2 billion and figure in the top 10 goods exports to the US. Diamond cutters in Gujarat and shrimp farmers in Andhra Pradesh and Odisha are likely to face the heat of the elevated tariff structure very soon. The government must think how best to tide over the challenge.
What is it that India can offer to the US in its bilateral trade agreement, which is still ongoing? Both countries had envisioned to take the bilateral trade to $500 billion by 2030, up from the current levels of about $200 billion. That was very optimistic, and India hoped that the tariffs imposed would hover around 10-15%, which applied to countries like the UK, EU, Japan, South Korea, etc. But that expectation wasn’t met and now it seems there is little chance to negotiate and bring the tariffs down to 15-20%. This scenario seems probable only if India offers something substantial. It could be crude oil/gas purchases from the US, defence items, high-tech chips, etc. Also, it can offer to lower duties on a variety of imports, from whisky and luxury cars to even agri-products like walnuts, cranberries, etc., and put import quotas on other sensitive agri-products. The US’s interest in agriculture is more in soya bean and corn, both of which are genetically modified (GM) crops. PM Atal Bihari Vajpayee had allowed GM cotton, the seed of which is already in our food system. Modi has to take a science-based stand on whether to allow GM food crops like rapeseed-mustard or Bt brinjal which are home-grown, or GM soya and corn to come in via imports under tariff rate quotas. Reforming our agriculture should remain a priority. Agri-research and development is the way forward. But the reduction of duties on agri-products has to be calibrated gradually and carefully. This is an overdue agenda, irrespective of Trump’s tariff pressures. One hopes India can do it.
The writer is distinguished professor, ICRIER.
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