Trump tariffs on India: India is facing the brunt of the tariffs imposed by the US, including the 25% duties levied as punitive damages for buying cheaper Russian crude.
The current 50% tariffs by Donald Trump on India threaten $45 billion worth of India’s exports.
Amid higher tariffs, India’s products might lose competitiveness, potentially benefiting countries like China and Vietnam, as tariffs imposed on India are higher than those on other Asian countries such as China (30%), Vietnam (20%), Indonesia (19%), and Japan (15%).
The tariffs are likely to shave off 60-80 basis points from India’s GDP growth if they stay in place for a year, a Reuters report, quoting economists, said.
While this does not bode well for the fourth-largest economy in the world, there are implications for the US as well.
“With 30-35% tariffs imposed on Canada, Mexico and China, the largest exporters to the US and accounting for more than $1.3 trillion of imports, we expect significantly more headwinds for the US economy than the Indian economy,” Ashwini Shami, President and Chief Portfolio Manager, OmniScience Capital, had told Mint earlier this week.
Meanwhile, SBI Research estimates that US tariffs are likely to affect US GDP by 40-50 bps and result in higher input cost inflation.
Should India impose tit-for-tat tariffs on US?
But the question remains, what can India do? Can following in the footsteps of its neighbour China, and imposing a tit-for-tat tariff on the US offer New Delhi a bargaining chip?
China and the US have been at loggerheads. The trade war between the world’s two largest economies, in a limbo for now, has significantly cooled since April.
At one point, the duties imposed by the US and China reached triple digits on both sides. This hit supply chains as many importers halted shipments to try and wait for the governments to work things out.
Since then, both sides have reached an agreement to de-escalate tensions and temporarily lowered tariffs to 30% on the United States’ side and 10% on China’s part.
Analysts don’t believe such a move would be in India’s best interest, saying the economic calculus argues against escalation. Rather, they see a solution for India through diplomatic channels, strengthening of the domestic economy and trade deals with other nations to tide over the impact of the tariffs inflicted by US President Trump.
The United States remains India’s largest export market. To strike too hard would be to wound oneself, said Sujan Hajra, Chief Economist & Executive Director, Anand Rathi Wealth Limited.
“The new tariffs are not confined to a narrow band of commodities but stretch across virtually the whole spectrum of Indian exports, and at rates that are close to prohibitive. What makes them more galling is the sense of singling out. America and several of its European allies continue to trade energetically with Russia, yet India alone has been chosen as the whipping boy. That makes a purely symbolic response by India harder to justify,” Hajra added.
G. Chokkalingam, Founder & Head of Research at Equinomics Research, highlighted that India’s dependence on the US economically in terms of IT service export is very substantial.
“I don’t think a reciprocal tariff by India makes sense because we have about $140 billion worth of IT service exports. So if they react to that, we will be in a very difficult situation,” he warned.
The US is the largest single market for Indian IT companies like TCS, Infosys, Wipro, HCL, and Tech Mahindra.
Currently, the 50% Trump tariffs on India do not apply to the services and pharmaceutical sectors. However, IT stocks have still been reeling under pressure, as investors are concerned about the economic fallout of these tariffs on the US economy.
What can India do to counter Trump tariffs?
According to analysts, the likeliest outcome, then, is a calibrated middle path.
We have a strong point only on the political front because the India, Russia, China alliance will be much stronger, said Chokkalingam.
“It will tilt the balance against the US-that’s one. Second, we need to boost domestic demand and take more aggressive steps to sign free trade agreements, like the ones we’ve signed with the UK and UAE. These measures can help us prepare for, or even deter, any further tariff escalation from the US,” Chokkalingam added.
Hajra believes that some retaliation, targeted at products with political resonance in American swing states, will be rolled out to show teeth. “But the measures will stop short of provoking an all-out tariff war, leaving space for negotiations that may yet soften the blow,” he added.