Mumbai: India on Thursday woke up to the news of a 26% discounted reciprocal tariff on all Indian goods imported into the US. Trump had earlier singled out India as “very, very tough” on levies, and on Wednesday, he said the 26% was a “discounted reciprocal tariff” for the 52% tariffs imposed by India on US products.
Imports from India are already facing a 25% tariff on steel, aluminium, and auto sectors in the US. For remaining products, India is subject to a base line tariff of 10% between April 5 and 8. Then the tariff will rise to country-specific 26% starting April 9.
“US has exempted pharma, semi-conductors, and energy products from tariff, and these sectors significantly contribute to India’s growth,” opined Mumbai-based trade economists.
“It’s welcome to note that the Modi government is evaluating the opportunities that may arise from the new US trade policy. The government, we believed, had worked hard in the last two recent months to negotiate tariff issues. More than $13bn worth of electronics goods and over $10 bn of gems and jewellery are among the top sectors to be hit by the new tariffs,” said a Dubai-based commodity trader.
The US trade deficit with India currently stands at $46bn, and Trump has made it clear that these tariffs will remain till this “threat” is resolved. According to reports, India is considering slashing tariffs on $23bn worth of US imports, including gems, jewellery, pharmaceuticals, and auto parts in a bid to appease Trump and bring down the tariffs, but no trade deal has been finalised yet.
Pharma’s exemption points to generic medicines’ critical role
The US has exempted pharmaceuticals from reciprocal tariffs, underscoring the critical role played by generic medicines globally, Indian Pharmaceutical Alliance (IPA) Secretary General Sudarshan Jain said. Pharmaceuticals and other essential items are exempted from the increased import duty is a welcoming move.
The decision underscores the critical role of cost-effective, life-saving generic medicines in public health, economic stability, and national security. Pharmaceuticals remain a cornerstone of this partnership, as India plays a vital role in global and US healthcare by ensuring a steady supply of affordable medicines.
The Indian pharmaceutical industry is committed to advancing the shared priorities of both nations: strengthening medicine supply chain resilience and reinforcing national security by ensuring access to affordable medicines for all. IPA is a network of top 23 Indian pharma companies, including Sun Pharma, Dr Reddy’s Laboratories, Lupin, Torrent and Glenmark. “With India importing USD 800 million worth of pharmaceutical products from the US and exporting USD 8.7 billion, the strong trade ties between the two countries create a powerful win-win scenario. This shift drives significant cost savings on life-saving medicines and also positions Indian exporters to gain a competitive edge over their Asian counterparts, further strengthening India’s leadership in the global pharmaceutical market.”
The US healthcare system relies heavily on India’s robust generic manufacturing and China’s API production, creating a supply chain that, if disrupted, would have immediate and severe consequences for patient care. Indian pharmaceutical companies supply a substantial proportion of drugs to US residents, with four out of ten of all prescriptions filled in the US in 2022 being supplied by Indian companies. Medicines from Indian companies provided $219 billion in savings to the US healthcare system in 2022 and a total of $1.3 trillion between 2013 and 2022. Generics from Indian companies are expected to generate an additional $1.3 trillion in savings over the next five years. Smaller drug firms operating on thin margins can face severe pressure, potentially forcing consolidation or closure.
Limited impact on agricultural exports
India could maintain or even expand its agricultural exports to the US despite the tariffs, as competing nations face even steeper duties, says agricultural economist Ashok Gulati. Trump’s 26% tariff on Indian goods would have a limited impact on key agricultural exports like seafood and rice when compared to higher duties imposed on regional competitors. “We should not look at the tariff increase in absolute terms, but see relative tariff increases with our competitors.”
For seafood exports, particularly shrimp, he explained that India’s relative tariff advantage combined with shrimp’s small share in overall US food expenditure means demand is unlikely to shrink significantly. Similarly for rice exports, where current US tariffs range between 9% and 11%, India maintains a competitive edge against Vietnam and Thailand despite the increase to 26%.
Tariff may erode GDP by up to 50bps
The reciprocal tariff can erode India’s GDP growth rate by up to 50 basis points to 6% and the country’s exports to the US could fall by 2-3 percentage points in the current fiscal. EY Chief Policy Advisor D K Srivastava said, “The maximum adverse impact on India’s GDP growth will not be higher than 50 basis points. As per our earlier projection, the GDP growth estimate for current fiscal was 6.5 per cent, which may go down to 6 per cent without retaliation.”
According to Standard Chartered Bank Head-India, Economics Research, Anubhuti Sahay, an effective 20% tariff increase on Indian exports to the US (after considering the exempted goods) is likely to adversely impact India’s GDP by 35-40 bps, ceteris paribus. However, the final impact would depend on the trade deal agreement between India and the US along with how each country negotiates/ retaliates on the proposed tariffs. She said while a loss in India’s GDP is inevitable on higher tariff rate imposition, India is likely to be relatively less impacted amongst the Asian economies as other countries have been hit by higher tariff rates than India or run a larger trade surplus with the US especially in the non-exempted sectors.
The US tariff hikes could have a favourable impact on the country’s exchange rate as the dollar could come under pressure in the US with a likely rise in inflation. The US has announced 26 per cent reciprocal tariffs on India saying New Delhi imposes high import duties on American goods, as the Trump administration aims to reduce the country’s trade deficit and boost manufacturing. Essential and strategic items such as pharmaceuticals, semiconductors, copper, and energy products like oil, gas, coal and LNG are exempted from higher tariff rates.
EY said India should respond to the 26% US tariff by reducing its trade surplus with the US by increasing imports from the US, particularly of crude oil, gas and high technology products such as aircraft, nuclear reactors and defence-related imports.
Indian market is unlikely to be flooded with US goods. There would not be a great demand for US automobiles in India as they are expensive.
Baker Tilly ASA India, National Head-Accounting and Business Support, Rajiv Arya said, “We need to reinvent and restart the three-decade-old liberalisation agenda. Over the last three decades, India has been a protectionist economy, as a result what started as an era of reduction of tariffs, reverted to be one of the highest tariffs globally.”
Morgan Stanley economists Upasana Chachra and Bani Gambhir said they see downside risk of 30-60 bps to growth estimate of 6.5 per cent for FY’26. “While the tariffs exceed our estimates for India, on a relative basis, these are at par/lower than other key competing economies. With goods exports to the US at 2.1 per cent of GDP… the direct impact will likely be less severe. However, a slowdown in US growth and weak global trade momentum will impact external demand. More importantly, we expect the impact to be more pronounced through the indirect channel of weaker corporate confidence, which will dent the risk appetite and further defer the capex cycle.
Abhishek Kumar, executive director at Avener Capital said, “Trump’s move to impose new tariffs targeting multiple nations has rattled global markets. However, with key details yet to be disclosed, the full impact remains uncertain, requiring a wait-and-watch approach. Notably, critical sectors like power equipment, energy, and pharmaceuticals, which are vital to India’s economic growth, have been exempted. India’s strategic focus on export diversification, value addition, and tapping into alternative markets—along with the development of new trade corridors from Europe to the US via the Middle East—will help mitigate some effects of these new tariffs.”
A major setback for gems, jewellery exports
The US tariffs are a major setback for the Indian gems and jewellery exports, according to Gem and Jewellery Export Promotion Council. It urged the government to take steps to secure the long-term interest of the sector. The reciprocal tariffs impose high import duties on American goods, as Trump administration aims to reduce US’ trade deficit and boost manufacturing.
The 26% reciprocal tariff would be a significant burden on Indian exporters and American consumers alike, the “In the long-term, we foresee a reshaping of global supply chains. In the short-run, we anticipate challenges in sustaining India’s current export volume of $10 billion to the US market. The US imports $11.58 billion gems and jewellery from India and exports $5.31 billion to the latter. The total bilateral trade in the gems and jewellery sector is $16.89 billion. Bilateral trade between India and the US includes natural and lab grown polished diamonds, gold and platinum jewellery, silver jewellery, imitation jewellery, rough diamonds, rough LGD, rough coloured gemstones, gold bar, silver bar and platinum bar, coloured gemstones.