As part of his “Make America Great Again” agenda, former U.S. President Donald Trump introduced reciprocal tariffs on countries he believed were imposing unfair taxes on U.S. goods. Among the affected nations was India, alongside China, Canada, and Mexico. This move, despite the seemingly strong rapport between Trump and Indian Prime Minister Narendra Modi, raised concerns about its impact on Indian exports and trade relations.
A reciprocal tariff is a tax imposed on imports that mirrors the tariffs levied by a foreign country on U.S. exports. The intent is to establish a fairer trade system by ensuring balanced tariff structures globally.
India, a key U.S. trading partner, has historically imposed higher tariffs on American imports compared to what the U.S. has placed on Indian goods. While the U.S. tariff rate on Indian products increased from 2.72% in 2018 to 3.91% in 2021 before slightly declining to 3.83% in 2022, India’s tariff rates on U.S. imports rose from 11.59% in 2018 to 15.30% in 2022. This discrepancy has been one of the justifications for the reciprocal tariff policy.
The economic impact of U.S. reciprocal tariffs on India is expected to be minimal. According to a report by the State Bank of India’s Economic Research Department, the additional tariffs—ranging between 15% and 20%—would likely reduce Indian exports to the U.S. by only 3% to 3.5%. Experts argue that India’s export diversification strategy, increased value addition, and alternative trade routes can offset this impact.
The U.S. remains India’s largest export destination, accounting for 17.7% of total exports in the financial year 2023-24. However, India has been actively expanding its trade relations with Europe, the Middle East, and other regions to reduce over-reliance on any single market. This shift is expected to mitigate any negative effects arising from U.S. tariffs.
Certain Indian industries may feel the heat of increased U.S. tariffs, particularly textiles, pharmaceuticals, and automobile parts. These sectors have traditionally benefited from favourable trade terms, but higher tariffs could make Indian products less competitive in the American market.
Additionally, the U.S. Trade Department is likely to scrutinize India’s subsidies and tax incentives to exporters. Given that India’s economy has significant government support in key industries, it could face further tariff barriers if these incentives are deemed as trade distortions.
Despite potential challenges, India has various strategies to navigate the new trade landscape. Some of these include:
- Increasing Imports from the U.S.: India may boost imports of American goods, such as defense equipment, oil, and gas, to balance trade relations and reduce its $38 billion trade surplus with the U.S.
- Boosting Foreign Direct Investment (FDI): U.S. companies might opt to set up local manufacturing in India to circumvent tariffs, leading to increased investments and job creation.
- Strengthening Self-Reliance Initiatives: While the U.S. may pressure India to purchase more American goods, India’s push for self-reliance (Atmanirbhar Bharat) could be adjusted to encourage domestic production while strategically managing imports.
The imposition of U.S. reciprocal tariffs on India presents both challenges and opportunities. While certain industries may face headwinds, India’s diversified trade strategy and expanding global partnerships could cushion the impact. Moreover, an increase in U.S. investments in India and a recalibrated import strategy could turn these tariffs into a strategic advantage.
Ultimately, the reciprocal tariff is neither a boon nor a bane but rather a call for India to adapt and strengthen its position in global trade.
