Despite pause, Trump’s tariff threat hangs heavy over India

India faces major economic fallout

Days after spewing fire and hiking import tariffs on goods from across the world that had sent markets into a turmoil all week, United States President Donald Trump last night decided to pause the higher tariffs and instead impose a blanket 10 pc tariff on all imports. The news was received with a huge sigh of relief by stock markets in the US, Europe and Asia. Though the pause offers a short-term relief, the uncertainty is far from over and India remains in a highly vulnerable position as India enjoys its largest trade surplus with the US and which Trump is determined to erode significantly. Economists predict that there is no relief for India in the medium term.

On Wednesday, Donald Trump, President of the United States, announced a 90-day pause on sweeping tariffs he had imposed on imports from countries all around the world, but pressed ahead with a 10 pc hike in duties on all imports. He also further raised the tariffs on Chinese imports as Beijing continued to stand firm and had imposed tit-for-tat tariffs on imports from the United States into China.

According to Trump over 75 countries had negotiated and not retaliated against him, which led to the pause, which is being welcomed by economists in India, who say that the three-month period would allow some exporters to prepare for the changed business scenario.

“The pause is a welcome step which allows Indian exporters to reassess the supply chain alterations and strategies to mitigate the loss. However, a 10 pc tariff which will be effective in these 90 days is still higher than the previous tariff. It seems to be a recalibration from the United States, however, that would their stance remains the same which is evident from the 10 pc tariff. Though there is scope for negotiations but not much is expected in the short term,” Akhtar Malik, Head of Programmes, BRIEF, a research institute based in Delhi, tells Media India Group.

Though Trump had been threatening about import tariffs even before he won the election in November 2024, things have come to a boil only in the past few days.

On April 7, global markets experienced what was termed a “Black Monday” when Trump acted upon his threats and imposed tariff on imports from over 70 nations, including some of the closest allies of the US in Europe, Latin America and Asia. The new policies sent shockwaves through the global economy and the US markets were the first to feel the heat as Dow Jones Index nosedived on news from the White House. Markets around the world registered their worst performance in years and lost trillions of dollars over the course of just two days.

The impact of this economic turmoil on Indian markets has been severe. Since Trump took over the Presidency of the United States on November 8, 2024, the Bombay Stock Exchange (BSE) Sensex, one of India’s key indices, has witnessed a drop from 79,486.32 on the day. The BSE which was at 82,133.12 on December 13, 2024, recorded its largest single-day drop in years, plunging by a staggering 2,226.79 points, or nearly 2.95 pc, to settle at 73,137.90 on April 7, this year.

Many analysts attributed this collapse to the ripple effects of the trade tariffs and concerns over a potential slowdown in global growth, particularly from the United States and China, which could have a significant impact on India’s economy.

The Indian Rupee also took a hit, depreciating significantly against the US Dollar, reaching its lowest levels in months. INR closed at 85.8350 per USD, down 0.7 pc on the day. As foreign capital fled Indian equities, the market struggled to regain stability, with some analysts predicting a continued period of weakness.

The situation worsened after Trump hinted at imposing tariffs on the pharmaceutical sector. Following the announcement, shares of pharmaceutical companies in India dropped by as much as 6 pc. The United States remains the largest market for India’s pharmaceutical exports, accounting for 36.6 pc of the total, which equates to USD 9.8 billion between April and February 2024-25.

In response to the growing global uncertainty, the Governor of the Reserve Bank of India (RBI) warned that these controversial tariffs are likely to have a negative impact on the global economy, which will, in turn, affect India’s domestic growth and export performance. He further emphasised that the increased tariffs imposed by the US on Indian goods could significantly harm India’s net exports, creating additional challenges for the country’s external sector. RBI has pared GDP growth forecast to 6.5 pc for 2025-26 amid the economic turmoil. Analysts say that the country’s trade surplus with the US remains highly vulnerable and could hurt a vast range of sectors of the Indian economy.

“India’s exports are expected to decline, given that the United States, accounting for nearly 18 pc of the country’s total exports has been a major export destination. As a result, the impact of this shift is likely to be substantial. Notably, among India’s key trading partners, the US has been the only country with which India maintains a trade surplus. However, the recent increase in tariffs on Indian exports to the US, coupled with tariff reductions for US goods entering India, is expected to erode this surplus. This development will widen India’s overall trade deficit, put additional pressure on foreign exchange reserves, and further strain an already slowing economy,” says Malik.

India’s timid response fails to help

In response to the tariffs imposed by the United States, different countries have reacted in various ways. While nations like China and Canada have retaliated with reciprocal tariffs, countries such as Vietnam have taken a more cooperative approach, reducing their own tariffs in hopes of gaining some concessions.

India, on the other hand, has been one of the first countries to engage directly with the United States President. India made several pre-emptive tax concessions, including reducing tariffs on high-end motorcycles, luxury cars and bourbon, as well as scrapping a digital services tax that had affected American tech companies. Recognising the proximity of billionaire Elon Musk to Trump, India not only allowed import of Tesla at sharply lowered rates, but also removed all hurdles to the entry in India of Starlink, Musk’s ambitious satellite telecommunication services company.

“In an attempt to mitigate the situation, the government implemented several measures, including reducing duties on luxury cars and solar cells, eliminating the 6 pc digital advertising tax, and lowering tariffs on bourbon whiskey from 150 pc to 100 pc. Despite these efforts, they had little influence on the decision of the United States to raise tariffs to 26 pc. While it may be premature to fully assess the government’s response, it is evident that the combination of tariff concessions and diplomatic engagement failed to prevent the tariff increase,” says Malik.

“India is currently engaged in discussions with the US to establish a bilateral trade agreement with the primary objective of mitigating the impact of the recent tariff hikes. However, given the US’ current approach to addressing its trade deficit, it appears unlikely that India will secure a highly favourable deal,” he adds.

US-China trade war and its impact on India

Amid ongoing tensions, a new trade war has erupted between China and the United States. In response to China’s actions, Trump raised tariffs on Chinese goods to 125 pc with immediate effect. This move was met with strong opposition from China, which retaliated by imposing tariffs of 84 pc on American products. This trade conflict is expected to have significant repercussions for India as well.

“One of the immediate concerns is the likelihood of China redirecting or dumping its surplus goods to alternative markets at significantly reduced prices. This dumping can disrupt local industries by undercutting domestic manufacturers. In India’s case, the challenge is compounded by higher logistics and production costs, which diminish the price competitiveness of local producers, making it difficult for them to compete with low-cost imports,” says Malik.

Although India is in a grey area regarding the impact, the escalating tensions with China could benefit India. Analysts believe that India is potentially the next largest alternative to the Chinese market for the US, and thus stands to gain from this shift.

“While the trade restrictions on China pose challenges, they also present a window of opportunity for other economies to replace China as a key exporter to the US. To effectively seize this opportunity, countries need to develop long-term strategies in specific sectors, strengthen their manufacturing ecosystems, and introduce targeted subsidies and policy support to build competitive advantages in the global supply chain,” he adds.