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April 14, 2025

Alankar Mishra

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US Tariff on India: Impact on Economic Growth and Trade

Trade relations between India and the United States have had their share of challenges and successes. Even though the two nations maintain a healthy geopolitical alliance, policies such as trade tariffs have strained this partnership. One of the most contentious topics in India-U.S. trade relations is the U.S. tariffs on Indian goods. These tariffs impact significant industries, export revenues and even India’s economic growth rate. This piece analyzes the economic impact of these tariffs on India’s economy, trade with America, and prospects for future trade relations with the US.

What Are Tariffs?

A tariff is a tax levied by one country on the goods and services imported from another country. The reason why tariffs are imposed is most commonly to protect local businesses from foreign competition, to generate revenue, or to respond to unfair practices.

In the case of the US tariffs on India, they were mainly implemented during the Trump presidency due to the imposed trade barriers and subsidies from India which include dairy, medical devices, and ICT (Information and Communication Technology) products.

Historical Background of US Tariffs on India

Relations started to strain almost 5 years ago when the US placed duties on India’s imports of aluminum and steel in 2018, applying Section 232 of the US Trade Expansion Act. As a countermeasure, India imposed tariffs on 28 products from the US.

In 2019, the US removed India’s GSP status, which had previously enabled India to export goods worth 6.3 billion dollars without tariffs. The suspension took a toll on vital Indian goods such as textiles, engineering goods, leather, and pharmaceuticals.

USTR Announcement on GSP Withdrawal

Key Indian Sectors Affected by US Tariffs

1. Steel and Aluminum

The 25% tariff on steel and 10% on aluminum significantly impacted India’s metal exports to the US. India, being the 10th-largest exporter of steel to the US before the tariffs, saw a drop in demand and profit margins.

2. Textiles and Apparel

India’s textile industry, which heavily relied on duty-free access under the GSP, suffered major losses post-revocation. Smaller exporters lost a competitive pricing advantage, affecting export volumes and employment.

3. Pharmaceuticals and Medical Devices

The US targeted price controls and market access restrictions in India’s pharmaceutical and medical devices sector. Tariffs, combined with regulatory pressures, have limited Indian firms’ reach in the world’s biggest healthcare market.

4. Agriculture

India’s agricultural exports, particularly spices, dairy, and seafood, also faced the heat. The dairy industry, in particular, became a sticking point due to U.S. demands for greater market access that clashed with Indian religious and ethical restrictions on imported dairy products.

Impact on India’s Trade Balance and Economic Growth

Trade Balance

In the fiscal year 2022-23, India exported goods worth $78.54 billion to the US, establishing the US as its foremost trading partner. However, due to US tariffs, Indian goods became more expensive, which in turn lowered their export competitiveness. As a result, this increased India’s trade deficit with other countries, especially as India sought to shift trade routes to other markets.

Source: Department of Commerce, India

Economic Growth

Global demand and trade uncertainties have resulted in a deceleration of India's GDP growth. Textiles, leather, and small-scale manufacturing, which depend heavily on US export markets, faced unemployment and factory shutdowns. As per industry estimates, the textile sector has single-handedly lost more than 1 lakh jobs because of fewer orders from exports.

How Indian Businesses are Coping

Indian businesses have taken action in the following ways:

1. Diversification of Export Markets: Businesses are now looking into exporting to Europe, Southeast Asia, and the Middle East to counterbalance dependency on the US.

2. Product Innovation: Certain industries are shifting focus towards high-value niche products to maintain their margins and maintain their foothold in the market.

3. Supply Chain Shifts: Indian firms are working with U.S. partners to establish or relocate assembly and manufacturing plants in the U.S., which allows them to completely avoid paying tariffs.

Government of India’s Response

The Indian government has taken multiple steps to mitigate the impact of the US tariffs:

1. Negotiations and Bilateral Talks

India has participated in bilateral negotiations with the US Trade Representative (USTR) to find a solution which would be favorable to both parties. Some of the most important items on the agenda are GSP restoration, reduction of tariffs, and increased access for Indian IT and pharmaceutical services.

2. Production Linked Incentive (PLI) Schemes

India has begun PLI schemes in specific industries, such as electronics, pharmaceuticals, and textiles, to enhance local manufacturing and exports. These schemes enhance global competitiveness while also lowering import dependency.

3. Strategic Trade Alliances

India is negotiating Free Trade Agreements (FTAs) with the UK, EU, and Australia to diversify export avenues while mitigating the effects of US tariffs.

Impact on Indo-U.S. Strategic Relations

Strained trade relations do not seem to have affected, or at least not significantly, the strategic partnership between India and the US, including defense, technology, and counter-terrorism. However, constant trade disagreements can create trust issues, causing a slowdown in cooperation on important developing technologies such as semiconductor manufacturing, artificial intelligence, and renewable energy.

As is often the case, trade reflects the state of diplomatic relations. The relationship of two countries that need each other’s resources for mutual growth will depend on the extent of mercantilism present in the trade policies of the two countries.

US Perspective: Why Tariffs on India?

From the viewpoint of the US, tariffs serve as a form of protection with the purposes of:

1. Maintaining equivalent access to markets (particularly India’s agriculture and medical device industries)

2. Responding to the data control and import duty policies of India

3. Allowing fair competition for American manufacturers

According to the U.S., Indian control of business competition through price controls and import bans seriously undermines the capabilities of American companies in India. Thus, the tariffs are designed to be both a benefit and a burden at the same time.

Future Outlook: Will Tariffs Stay or Go?

Possible Relief under Biden Administration

Although the Biden administration appears to be taking a less hostile approach towards India, no definitive actions undertaken to reinstate the GSP or eliminate tariffs. Nonetheless, both nations seem to be willing to address the trade issues through peaceful discussions rather than aggressive strategies.

India’s Push for Self-Reliance (Aatmanirbhar Bharat)

The goal of India’s self-reliance policy is to strengthen domestic manufacturing capabilities, which would reduce vulnerability to exports. However, for the US to invest, there needs to be an improvement in the overall business environment such as softened trade policies, stable taxation structure, and less bureaucratic red tape.

Conclusion

US tariffs on India are more than a mere financial burden; they form an intricate part of the trade dynamics as India emerges as a global power. Even though the tariffs have inflicted suffering on Indian exporters and stifled growth in vital sectors, they have nevertheless catalyzed an important introspection regarding India’s global trade policies.

A progressive vision fosters positive dialogue and deepens mutual respect for shared growth goals. In an era where parts of the world are deglobalizing while other portions undergo a surge in bilateralism, it is critical to note that trade between India and the US will continue to serve as a cornerstone in defining the economic growth of the two countries as well as the geopolitical power structure of the 21st century.

FAQs

Q1. Why did the US impose tariffs on Indian goods?

The primary reasons that the US imposed tariffs on Indian products were trade deficits, market entry obstacles, and the overall alarming treatment towards American goods, especially in dairy commodities, medical equipment, and Information and Communications Technology (ICT) services. The US pointed to India's substantial import tariffs and regulatory constraints as justifications.

Q2. How did the removal of GSP status affect India?

The withdrawal of the Generalized System of Preferences (GSP) associated with India resulted in the implementation of duties on exports exceeding $6 billion. This decreased textile, engineering goods, and pharmaceutical exports, negatively impacting small Indian businesses.

Q3. Which Indian industries were most impacted by US tariffs?

The following industries suffered the most because of US tariffs: steel, leisure, textiles, aluminum, chemicals, and agriculture. The price disadvantages these industries faced led to export loss, unemployment, and lowered competitive ability in comparison to other nations in the market.

Q4. What would be the impact of US tariffs on India’s economic growth?

The US tariffs negatively impacted India's trade-related income, added ambiguity to trade deals, and stagnated growth in important employment sectors. Even though India’s cumulative GDP was not significantly hindered, some industries dominantly faced acute burdens and lost a considerable portion of competitive market presence.

Q5. How is the Indian government responding to the US tariffs?

India is now zeroing in on the negotiation of trade deals, the continuation of GSP benefits, the development of new export markets, and policies that support domestic manufacturing and exports such as PLI schemes. They are also considering more strategic trade partnerships with other countries.

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