The United States has notified India of the reinstatement of tariffs on Indian imports, set to take effect tomorrow, August 27, 2025. This move marks a significant escalation in the trade tensions between the two countries, with the Trump administration imposing a total duty of 50% on many Indian goods. The tariffs are among the highest the U.S. charges on any of its trading partners.
Background
The U.S.-India relationship has been strengthening for decades, with cooperation in the Quadrilateral Security Dialogue (Quad) aimed at counterbalancing China's regional influence. In February 2025, Prime Minister Narendra Modi visited the U.S., with the goal of boosting trade, agreeing on “Mission 500” to reach $500 billion in trade by 2030, and discussing defense and energy cooperation. However, disagreements over trade barriers and India's relationship with Russia have led to renewed tensions. The Trump administration is concerned about India's high barriers to trade and the significant U.S. trade deficit with India. The White House has also threatened to impose an additional 25% tariff beginning August 27 if India does not eliminate its sizable imports of Russian oil.
Impact on India
The tariffs threaten India's $434 billion export engine, with $87 billion directed to the U.S., equivalent to 2.5% of India's GDP. Industry estimates suggest a $4–5 billion drop in engineering exports alone, while overall GDP growth could decline by 0.2–0.5%, with forecasts revised from 6.5% to as low as 6%. Sectors like textiles, gems and jewelry, auto parts, and certain foodstuffs will face higher costs and less choice. Small and medium enterprises (MSMEs), which dominate textiles and leather, face reduced competitiveness against rivals in Vietnam and Bangladesh, where tariffs are lower. The tariffs affect over 55 percent of Indian shipments to the United States. A sustained 50% tariff could cut India's GDP growth by 1 percentage point over time.
However, some analysts suggest that a cumulative 50% tariff is unlikely to significantly derail India's growth, thanks to robust domestic demand. Sectors such as pharmaceuticals, smartphones, and steel are relatively insulated due to exemptions, existing tariff structures, and strong domestic consumption. The macroeconomic impact of the hike in tariffs would be cushioned by the large size of India's domestic market.
Indian Response
The Indian Ministry of External Affairs has criticized the U.S. tariffs as unjustified and unreasonable, stating that India's imports of Russian oil were a necessary measure to ensure affordable energy for its 1.4 billion citizens amid global supply disruptions. The Ministry pointed out that, unlike India, the United States and the European Union maintained substantial trade with Russia without similar strategic necessity. Prime Minister Narendra Modi has asserted he can't compromise on interests of farmers, cattle-rearers, small-scale industries, cautioning 'pressure on us may increase, but we will bear it'. The Modi government has responded with calm, avoiding knee-jerk reactions.
Potential Ramifications
The tariffs could have several ramifications:
The U.S. and India need to address the 25 percent reciprocal tariff related to a trade agreement and the possible additional 25 percent tariff related to India's oil imports from Russia. Continuation of this trade dispute would inevitably have a negative impact on certain sectors of India's economy.
