India's Response to Trump2.0 Shock
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APRIL 2025
US Reciprocal Tariffs on India
On April 2, the United States implemented reciprocal tariffs of 26% on Indian imports, a move that could significantly alter trade relations between the two economies.
This policy seeks to counterbalance India’s tariff structures by imposing equivalent duties on Indian goods entering the US.
While this measure aims to create a level playing field, it introduces complexities and potential disruptions to bilateral trade worth $129.2 billion.
The implications of this policy stretch beyond simple taxation, impacting industries, diplomatic ties, and global trade alignments.
Understanding Reciprocal Tariffs
A tariff is a tax levied on imported goods, either as a flat fee or a percentage of the product’s value.
Governments utilize tariffs primarily as a protectionist measure to shield domestic industries from foreign competition by making imported goods more expensive.
Other justifications include raising revenue, addressing national security concerns, and using tariffs as a negotiation tool in trade agreements.
Reciprocal tariffs function by mirroring the duties imposed by a trading partner.
Theoretically, this strategy incentivizes countries to lower their tariffs to avoid heightened duties on their exports.
If India responds by reducing its tariffs on US goods, the US may reciprocate by easing its own tariffs, potentially leading to a mutually beneficial market opening.
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Reciprocal tariffs function by mirroring the duties imposed by a trading partner.
However, this approach can also perpetuate a cycle of protectionism, limiting consumer choices and increasing costs.
Challenges in Implementing Reciprocal Tariffs
The concept of exact reciprocity is complex.
The US imports thousands of products from over 175 countries, each subject to different tariff rates, quotas, and regulatory barriers.
Achieving perfect reciprocity would require the US to impose matching tariffs on every individual product category, an administrative challenge that could result in an unwieldy and costly trade system.
US President Donald Trump championed the policy of reciprocal tariffs, arguing that the US should not tolerate high import duties imposed by other countries without a proportional response.
India, in particular, has been a target due to its steep tariffs on key imports such as automobiles, chemicals, and electronics. Indian auto tariffs, for instance, exceed 100% on US vehicles.
Under the new policy, the US will impose similar tariffs on Indian auto imports, which could significantly impact trade dynamics.
India-US Trade Landscape in 2024
($1 = ₹83.3 Assumed)
The U.S. remains India’s largest trading partner, with total goods trade reaching ₹10.76 lakh crore ($129.2 billion) in 2024.
U.S. exports to India grew to ₹3.48 lakh crore ($41.8 billion), a 3.4% increase from 2023, while Indian exports to the U.S. surged to ₹7.29 lakh crore ($87.4 billion), marking a 4.5% rise.
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Indian auto tariffs, for instance, exceed 100% on US vehicles.
This trade imbalance, with a ₹3.82 lakh crore ($45.7 billion) deficit for the U.S., has been a key point of contention.
India’s primary exports to the U.S. include packaged medicines (₹87,000 crore or $10.4 billion), diamonds (₹63,700 crore or $7.61 billion), broadcasting equipment (₹51,800 crore or $6.18 billion), and petroleum products (₹4,380 crore or $522 million).
Meanwhile, U.S. exports to India are led by crude petroleum (₹46,000 crore or $5.5 billion), coal briquettes (₹38,600 crore or $4.61 billion), and gas turbines (₹20,000 crore or $2.39 billion).
Given that 17.7% of India’s total exports are directed to the U.S., the imposition of reciprocal tariffs could significantly disrupt Indian industries reliant on U.S. markets.
India’s Tariff Policies with US
India has historically employed a protectionist tariff policy.
While US tariffs on Indian goods have remained relatively stable—rising from 2.72% in 2018 to 3.91% in 2021 before slightly declining to 3.83% in 2022—India’s tariffs on US goods increased from 11.59% in 2018 to 15.30% in 2022.
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This trade imbalance, with a ₹3.82 lakh crore ($45.7 billion) deficit for the U.S., has been a key point of contention.
The disparity has been cited by the Trump Administration as a justification for reciprocal tariffs, with Washington signalling that it will not accept one-sided trade barriers.
Can India’s Global Alliances Mitigate US Tariffs?
India’s response to US tariffs will be shaped by its ability to diversify trade partnerships. India is an active participant in several global trade alliances that do not include the US, offering alternative markets like:
BRICS (Brazil, Russia, India, China, South Africa): BRICS nations account for over 25% of global GDP and 42% of the world’s population.
Trade within this bloc is growing at an annual rate of 10.7%, three times the global trade average. It has posed a major challenge to US administration as this bloc proposed trading outside the dollar currency.
Shanghai Cooperation Organisation (SCO): In 2023, trade within the SCO reached approximately $650 billion, strengthening India’s ties with China, Russia, and Central Asian nations.
With war in Ukraine, the Russian Chinese ties have deepened while Indi-China ties have remained severed due to border issues. Still China has a trade surplus with India, and it is growing.
ASEAN and Indo-Pacific alliances: India is deep economic relations with the Indo-Pacific Economic Framework (IPEF) and ASEAN to enhance trade with Southeast Asia.
Indian exports in pharmaceuticals, IT services, and infrastructure are on the rise in these regions.
Further to counterbalance the effects of US tariffs, India must actively pursue bilateral trade agreements: like
EU and UK Free Trade Agreements (FTAs),
Middle East and North Africa (MENA): The UAE, Saudi Arabia, and Egypt markets for Indian energy, textiles, and electronics,
Latin America and Africa: enhancing trade relations with Brazil and Argentina, focusing on automotive components, agriculture, and pharmaceuticals and
Australia and New Zealand: for Comprehensive Economic Cooperation Agreements (CECAs) to facilitate diversified trade.
India’s Actual Response to Trump’s Tariff Politics
It is unclear what stance the Indian government intends to take in response to Trump’s tariff threats.
Trump’s strategy involves imposing different tariffs on different countries to prevent a collective opposition to his policies.
In response, the Indian government announced a 2% tax reduction in the 2025 budget, followed by a further 6% reduction in the digital service tax, a move widely perceived as benefiting American companies like Google.
The opposition remains sceptical of these seemingly arbitrary tax cuts, questioning whether the Indian government is yielding to pressure from Donald Trump.
So far, there has been no public discussion in Parliament regarding India’s official response to the US tariff regime.
In the realm of geopolitics, several nations are forming alliances to counter Washington’s unilateral tariff policies. However, India has not yet joined this informal consortium.
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So far, there has been no public discussion in Parliament...
For example, Canada and European Union leaders have openly responded to Trump’s tariffs while keeping their respective parliaments informed.
This level of transparency is lacking in India, as Parliament has yet to deliberate on the issue.
Oil-producing nations have started coordinating their responses to global trade challenges.
Similarly, India should consider forming alliances with other countries that export agricultural goods, textiles, and industrial products to the US.
It is feared that the ongoing tariff war is so severe that it could significantly weaken the Indian economy.
At a time when India is already struggling to revive its growth momentum, a trade war with Trump is the last thing it needs.
Therefore, Parliament must be consulted to ensure that India takes a firm and united stance—one that is both strategic and courageous as India-US trade relations will depend on hard negotiations, strength of non-US strategic alliances, and Indian domestic economic adaptability.
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