India runs a merchandise commerce surplus with the U.S. — for 2024-25, it stood at $41.18 billion — which is growing over time. To slim this commerce surplus, the U.S. seems to focus each on India’s exports and imports. While a 25% reciprocal tariff might hamper India’s exports, the penalty might work on exports in addition to function a non-tariff barrier on crude imports from Russia, thus, pushing India to import crude from the U.S. or elsewhere at the next value. While the U.S.’s measures might scale back the commerce hole between the 2 nations, you will need to perceive its implications on India’s progress and exterior account. Such unilateral actions are opposite to the ideas of free and honest commerce.
Impact of reciprocal tariffs
The rapid affect of reciprocal tariffs can be on the commerce steadiness. Assuming that there is no such thing as a affect on imports from the U.S. (apart from a restricted diversification of oil imports from Russia to the U.S.), tariffs might adversely affect India’s exports to the U.S. But to what extent? Assuming that the import elasticity with respect to tariffs as (-)1, which is on the next aspect, India’s exports to the U.S. can go down by 25% — this can be a sharp decline. However, its affect on commerce steadiness is dependent upon how a lot the share of India’s exports to the U.S. is in complete exports. As the information for 2025-26 is just not accessible, the implications of this anticipated drop in U.S. exports is labored out for 2024-25, ex submit.
Even within the excessive case, the place elasticity is assumed to be (-)1, the general commerce deficit widens by about 0.56 % of GDP to 7.84%. Consequently, actual GDP progress drops by about 0.6% to five.9% from 6.5%. What is of extra concern is its affect on the Current Account Deficit (CAD). Due to the U.S.’s reciprocal tariffs, the CAD is estimated to extend from 0.6% to 1.15%. While these estimates are for 2024-25, the extent of the affect in 2025-26 wouldn’t be very completely different from these estimates for 2024-25, had the tariffs been efficient from the start of the 12 months. However, within the present 12 months (2025-26) 4 months are behind us, the decline in GDP progress charge could also be 0.4%, and correspondingly the CAD can also be lowered.
Some caveats
These estimates are, nevertheless, topic to some caveats. India lately signed a complete financial and commerce settlement with the United Kingdom, whereas negotiations are underway with the European Union and different main nations and their affect on exterior account is just not assessed. These could have a beneficial impact on the CAD.
We are additionally not contemplating the results of tariff will increase imposed on different nations which might be rivals for Indian exports, and this may average the affect on India’s exports. Further, we aren’t making an allowance for any possible adjustments within the alternate charge because of the latest U.S. commerce measures and its affect on commerce steadiness. Indeed, the rupee-U.S. greenback depreciated sharply and was hovering over ₹87.5 since reciprocal tariffs had been imposed. The new commerce agreements in addition to rupee depreciation might assist slim the CAD a bit and in addition restrict the affect of the U.S. tariffs on India’s GDP progress to some extent.
But for 2025-26, and for the approaching years, GDP progress, even after contemplating these two components, might nonetheless be decrease by about 0.5% than the bottom case progress forecast of 6.5%; the CAD might additionally widen by an identical extent. Further, following the penalty risk, any bigger shift away from Russia on crude imports and in the direction of the U.S. may need additional implications on the CAD in addition to the alternate charge and home inflation. Added to this, a rise in world oil costs and the uncertainty surrounding the world financial system might exert extra strain on the CAD and its financing. It may also impact inflation.
How can India mitigate the draw back dangers of Donald Trump’s tariffs? One possibility is that India nonetheless has the house to barter with the U.S. because the commerce deal has not but been finalised whereas not yielding on contentious points corresponding to agriculture and allied sectors and micro, small and medium enterprises.
The different means is, as many have urged, to diversify the export market. But this could be tough within the quick time period. One attainable means is to have a look at our personal tariffs that we impose on our imports. Our empirical outcomes do counsel that India’s exports are negatively affected by import tariffs. The estimated elasticity with respect to import tariffs is greater than (unfavourable) one. With the growing import content material of our exports over time, the unfavourable affect of tariffs on exports progress has solely elevated. The authorities could take a look at the present tariff charges and will scale back those who have an antagonistic impact on exports.
Impact of penal levy
The affect of the penal levy, which is one other 25%, may have the identical impact as reciprocal tariffs. However, there are some commodities which might be exempt from this levy. Here the affect will probably be considerably decrease. Taken collectively, the overall affect on India’s progress charge will be fairly extreme, a discount of over 0.6 share factors from the bottom progress charge of 6.5% within the present 12 months. To keep away from the penal levy, India has to convey to the eye of the world at massive the inequity of the choice. It is very discriminatory. There are many different nations which import from Russia way over what India does. The interval of three weeks that’s accessible now for negotiation should be successfully utilised.
Reciprocal tariffs with penal levy are a transparent case of utilizing tariffs to compel nations to observe a selected coverage. India must work with different nations to get again to a distinct system of world commerce. While the rapid affect of the tariffs on the expansion charge of India could also be managed, the continuation of this sort of commerce regime is not going to be within the pursuits of all nations together with the U.S. and India.
C. Rangarajan is Chairman, Madras School of Economics, Chennai. N.R. Bhanumurthy is Director, Madras School of Economics, Chennai
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