Context

Recent U.S. trade actions have introduced major challenges to India’s economic momentum and external sector stability.

·       Effective August 7, the U.S. imposed a 25% reciprocal tariff on Indian exports.

·       A second 25% penal levy, announced on August 6, will be enforced starting August 29, 2025, in response to India’s continued crude oil imports from Russia.

These trade measures are expected to significantly affect India’s trade balance, GDP growth, current account deficit (CAD), and its overall strategic trade alignment.

India–U.S. Trade Relationship

·       India holds a merchandise trade surplus with the U.S., valued at $41.18 billion in 2024–25, with the gap steadily increasing.

·       The U.S. actions are impacting both sides of India’s trade:

o   Export Tariffs: Target India’s export competitiveness.

o   Crude Oil Penalty: Aims to limit Indian oil imports from Russia by imposing non-tariff trade pressure, possibly redirecting purchases to higher-cost U.S. oil.

These steps compromise the idea of free and fair trade, adding geopolitical undertones to what should be economic decisions.

Economic Impact of Reciprocal Tariffs

·       Exports: A 25% export decline is expected, assuming an import elasticity of –1.

·       Trade Deficit: Could widen by 56% of GDP, increasing the overall deficit to 7.84%.

·       GDP Growth: Projected to fall 6 percentage points, from 6.5% to 5.9%.

·       Current Account Deficit (CAD): May climb from 0.6% to 1.15%.

For 2025–26, with four months passing before full implementation, the GDP dip may be –0.4%, with a proportionally smaller rise in the CAD.

Mitigating Factors & Caveats

Despite the adverse outlook, some buffers exist:

·       New Trade Deals: India’s UK trade agreement, and ongoing talks with the EU and others, could partially cushion export losses.

·       Competitive Advantage: Tariff hikes on other nations by the U.S. might inadvertently shift demand back to Indian goods.

·       Rupee Depreciation: A lower exchange rate (₹87.5/USD) could improve export competitiveness.

However, these factors may not offset the entire shock. Projections still suggest a 5% reduction in GDP growth and a similarly widened CAD for FY 2025–26.

If India is forced to switch from Russian to U.S. crude, the CAD could worsen further, the rupee may depreciate more, and inflation may rise, particularly if global oil prices increase.

Policy Recommendations for India

1. Engage Diplomatically with the U.S.: The current trade deal remains under negotiation, offering a chance to protect key sectors like agriculture, MSMEs, and allied industries.

2. Diversify Export Market: Although tough in the short term, a long-term pivot towards new markets is vital. India should also reassess its own tariff structure to support export sectors. Evidence shows India’s own import tariffs negatively affect exports, with elasticity worse than –1.

3. Lower Input Tariffs: Reducing tariffs on imported inputs used in exports can strengthen manufacturing, improve trade resilience, and boost competitiveness.

The Penal Levy: Additional Pressure

·       The second 25% tariff, termed a penal levy, mirrors the effects of the reciprocal tariff but is slightly mitigated by commodity exemptions.

·       Combined, both measures could slash over 6 percentage points from the current year’s GDP growth forecast.

·       India views this action as discriminatory, especially since many nations import more from Russia without facing such penalties.

The three-week gap before the penalty becomes effective is a crucial window for diplomatic resolution.

Conclusion

These tariff actions reflect a broader trend of trade policy being used as a geopolitical tool. While India can deploy short-term measures—negotiations, currency adjustments, and diversified trade partnerships—the ongoing use of such unilateral actions threatens the foundations of a rules-based global trade system.

Moving forward, India must:

·       Protect its trade interests,

·       Strengthen export capabilities, and

·       Reduce overdependence on any single market or energy source.

In parallel, coordinated efforts with like-minded nations are essential to restore a non-discriminatory, stable trade order.