Reforms, export diversification key options for India amidst raging tariff tempest

TOM CRUISE-STARRER Hollywood flick Oblivion (2013) should have had nothing to do with the tariff travails the global economies have been facing in the wake of U.S. President Donald Trump’s moves since April this year. Yet, after the conclusion of the India-U.K. Comprehensive Economic and Trade Agreement (CETA) on July 24, when a top Indian government functionary was asked about the possibility of the U.S.-India bilateral trade agreement anytime soon, he referred to the movie, which he had watched on his way back to India from the U.K. after the CETA was signed. Borrowing from the plot of the dystopian movie, set in a post-apocalyptic Earth in 2077, the functionary said the film showcases mind-reading technology, which, sadly, is not available now, and, therefore, one can’t really say what is going on in Trump’s mind. The government functionary was bang on point. In a sudden U-turn on July 30, Trump threw the U.S.-India trade talks in disarray by announcing that America will impose penal tariffs on India for buying crude oil from Russia amid the Ukraine crisis. On August 7, an additional 25% penal tariffs were imposed by the U.S. administration on India, taking the total tariffs to 50% with effect from August 27. As things stand now, the five rounds of trade talks between India and the U.S., held since January this year, have been jeopardised and a sixth one scheduled in late August has been cancelled. With the tariff blow likely to hit multiple sectors of the economy such as textiles, and gems and jewellery, the finance ministry has reached out to the stakeholders. “The government will announce a targeted package for the affected sectors, to be effective till the time those sectors find alternative geographies for exports,” a top finance ministry source tells Fortune India. That said, India continues its growth journey logging 7.8% GDP growth in Q1FY26. On tariff risks to growth, CEA V. Anantha Nageswaran said, “While we should acknowledge the downside risks, it is not necessary to expect it of a very significant nature.” He added that the FY26 growth projections (6.3-6.8%) are not being lowered at the moment. Meanwhile, India has exposed the hypocrisy of the U.S. administration, highlighting that both America and the European Union continue to have trade ties with Russia, and singling out New Delhi is unjust. “The U.S. continues to import from Russia uranium hexafluoride for its nuclear industry, palladium for its EV industry, fertilisers, as well as chemicals. The European Union in 2024 had a bilateral trade of €67.5 billion in goods with Russia,” the ministry of external affairs said in a release on August 6. In the days following the imposition of the 50% tariff, coupled with renewed American support for Pakistan, India-U.S. diplomatic ties have only seen new lows. Ignoring advice from saner voices like economist Jeffrey Sachs and former U.S. ambassador to the U.N. Nikki Haley, who have cautioned against the trade tensions with India, the Trump administration continued its broadsides against New Delhi. U.S. treasury secretary Scott Bessent accused India of profiteering by reselling Russian oil. He did not call out China for doing the same. Defending India against attempts to isolate the country for its energy ties, external affairs minister S. Jaishankar said during a visit to Russia that India is not the top buyer of Russian oil; it is China. The minister also pointed out that India is not the top LNG importer from Russia; it is the E.U. Later, Trump’s trade advisor Peter Navarro retorted, saying India is acting like a “laundromat for the Kremlin”. In no time, India initiated revival of ties with China, which had been on the back-burner since the Galwan clashes in June 2020. Prime Minister Narendra Modi’s bilateral meeting with Chinese President Xi Jinping on the sidelines of the Shanghai Cooperation Organisation (SCO) summit reflects India’s promptness in resetting strategic and diplomatic ties, and egg on the face of U.S. diplomacy, which Trump seems to have sacrificed on the tariff altar. While the India-U.S. diplomatic ties have taken a back seat, the ramifications on the domestic economy are one of the key concerns. “Given the importance of the U.S. market for India’s goods exports and the tariff rates that would apply to a significant portion of India’s merchandise exports to the U.S., India would face effects, unless the uncertainty is resolved soon, resulting in lower duties,” the finance ministry said in its monthly economic report for July. A 50% tariff on India is almost like a trade barrier because exports may lose their advantage. “The 50% tariff... is broadly negative. It is expected to have a significant impact on the export of textiles, leather, gems and jewellery, and marine products,” says Miren Lodha, senior director, Crisil Intelligence. Brokerages are of the view that America’s 50% tariffs on India are likely to dent the country’s GDP by up to 80 basis points. Goldman Sachs said the additional 25% penal tariff could constitute a potential incremental drag of around another 0.3 percentage point (pp) annualised, over and above a direct hit of 0.30% on India’s GDP growth due to the Liberation Day tariff of 25%. “We had previously flagged a downside risk of 0.2pp to our baseline FY26 GDP growth forecast of 6.2% in reaction to the initial 25% tariff imposition,” Nomura said. It had also pointed out that if the additional 25% tariffs materialise, then the hit could be higher, depending on their duration. Morgan Stanley expects a downside risk of 40-80 bps if tariffs persist at a higher level for a longer period. In its assessment of the sector-wise losses to Indian businesses, Global Trade Research Institute (GTRI) said the gems and jewellery sector may witness losses to the tune of $12 billion, while textiles and clothing could face an impact worth $10.3 billion. Losses to electrical and mechanical machinery have been pegged at $9 billion, and chemicals may face a $2.34-billion impact. GTRI added that the leather and footwear industry may face an impact to the tune of $1.18 billion. It is in this backdrop that PM Modi, in his Independence Day address, has given a clarion call for next-generation reforms and a renewed impetus to the spirit of Atmanirbhar Bharat — thereby deploying India’s trusted tools in dealing with global disruptions, ever since Covid. “Today, when economic self-interest is growing across the globe, the demand of the hour is that we must not sit lamenting over crises. With courage, we must strive to enhance our own strength and standing,” PM Modi said in the address. He immediately kicked off key reforms like the GST overhaul, which are expected to make the Indian industry more competitive. Industry is also in sync with the government. On August 24, the Confederation of Indian Industry (CII) unveiled a policy report — Policies for a Competitive India — listing 250 actionable recommendations across 14 critical reform areas. “These recommendations are in support of the Prime Minister’s call for bold and transformative change,” said Rajiv Memani, president, CII. Experts say India should diversify trade and desist from retaliation. India imported goods worth $41.5 billion from the U.S. in 2024. Retaliatory tariffs will only make imports from the U.S. costlier and have an impact on inflation — which hit an eight-year low at 1.55% in July — thereby affecting the end consumer. “Unnecessary import restrictions have to be avoided. Imbalances in trade accounts have to be addressed through increasing exports. We are an import-dependent country. Restricting imports is self-defeating, as several products serve as intermediaries for local consumption goods and exports. Retaliation is not going to help at all. The cost of implementing any retaliatory policies is going to be huge. The taxpayer should not be burdened with that. Also, there is no point in going to the WTO as it is dead,” Biswajit Dhar, a trade economist and former JNU professor, tells Fortune India. Ashwani Mahajan, national convenor, Swadeshi Jagran Manch, says that while the U.S. is a friend, till it does not understand India’s concerns, there cannot be a deal. “For any agreement, partners have to understand each other’s priorities and also the concerns on which there cannot be any agreement,” Mahajan tells Fortune India. Scouting for options beyond the U.S. is the need of the hour. “One of the important things the government must do is to diversify exports. Depending too much on a single economy is never a good thing. In the past few years, we have unnecessarily increased our exposure to the U.S. It is time for us to find new partners,” says Dhar. He suggests that moving to the developing world comes naturally to India. “We are a part of the developing world, and our preferences are similar to the developing countries and there is going to be demand for our products in those countries. We have not done enough,” he says, suggesting that it is time India taps markets in Africa, with quality products. “We are working on minimising the impact. One way is to find alternative markets,” says Harsh Vardhan Shringla, former foreign secretary and Rajya Sabha MP. Mahajan says that diversification of trade is a possibility. “If you see, many geopolitical changes are taking place. Apart from BRICS, South Asian countries are coming together. They have also suffered at the hands of the U.S. And the U.S. is going to only harm itself as inflation is definitely going to rise,” he says, adding that indirect taxes always create inequality. “The objective of tariffs is to protect industry. But the U.S. is protecting imaginary industries,” says Mahajan. Supporting MSMEs to look at new vistas should be a government priority, says Lodha of Crisil. “As an immediate step, handholding of MSMEs, given their vulnerability, is crucial. Offering them support to explore other markets to showcase products through roadshows and product exhibitions is a good starting point,” he says, adding this should be done jointly by industry and ministries. It is clear that India must take the strategic route of reforms and export diversification in the wake of the tariff fallout. If references can be picked up from Hollywood amidst the India-U.S. trade tensions, Bollywood, too, has doled out valuable advice on the matter. Actor Suniel Shetty said in a recent post on LinkedIn that to be taken seriously in the global trade game, we can’t just raise our voices, but we need to raise our capabilities. “With my background in martial arts, I know what it means to take a punch… and still think about the next 10 moves, not just reaction to the punch you took,” Shetty said in the post. For India, too, it is time to think of the next 10 moves. Fortune India is now on WhatsApp! Get the latest updates from the world of business and economy delivered straight to your phone. Subscribe now.

Reforms, export diversification key options for India amidst raging tariff tempest

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