Vanijya Bhawan, located right next to India Gate amidst lush green trees and a panoramic view of Lutyens’ Delhi, houses the Union Ministry of Commerce and Industry. In recent days, it has seen a flurry of activity as officials negotiate trade deals with over 10 countries, including the US. THIS COMES AMID US PRESIDENT DONALD TRUMP’S SALVO OF “RECIPROCAL” TARIFFS FOR MOST countries. Though Paused for now, it WARRANTS CLOSER SCRUTINY OF INDIA’S FOREIGN TRADE SITUATION AND A CALIBRATED POLICY RESPONSE.
Exports were one of the four key engines for the Indian economy outlined by Finance Minister Nirmala Sitharaman in Budget 2025-26, but trade dynamics have since become the topmost priority for New Delhi in light of an increasingly uncertain global environment and new dynamics that bring in fresh volatility into the mix almost every other day.
The tariffs, announced by Trump on April 2 and put on hold for 90 days on April 9, could trigger a recession in the US if and when they kick in, devastate global trade and economic growth prospects, and cast a shadow even on economies like India that have strong domestic drivers.
For India, trade and exports have become an increasingly important part of its economy. The country has set a target of reaching $2 trillion in exports by 2030—with $1 trillion each of merchandise and services exports—as it aspires to become a global manufacturing hub. The share of goods exports is just 12% of the GDP as of now, compared with 20% for China.
In recent months, India’s commerce ministry, led by Minister Piyush Goyal, has been engaged in a slew of negotiations for free trade agreements (FTAs) with several countries. Negotiations with the UK and New Zealand have also been re-launched with great gusto this year, even as the minister hopes to conclude at least a pact with the European Union this year. At present, India has FTAs with 13 countries, including the UAE, and an interim pact with Australia.
The sense of urgency was necessitated after Trump returned to the White House on a plank of protectionism that talked of Making America Great Again. Since Trump assumed office as the 47th President of the US in January, he has announced a series of tariff hikes on several items and countries, before finally unveiling his much-talked-about reciprocal tariffs on nearly 60 countries. This included a “discounted” 26% tariff on Indian imports to the US.
While the tariffs on most nations are on hold, Trump’s moves have no doubt led to a new global trade war with increasing uncertainties as the EU and China have levied retaliatory tariffs on the US.
Anup Wadhawan, India’s former commerce secretary, noted that the US was expected to put the tariffs on hold because of pressures from US businesses and consumers on whom the impact would have been catastrophic. India, like others, would now also be at the 10% tariff level and the negotiations would be the window to get them eliminated. “I am sure the pause will remain beyond 90 days pending negotiations, which should lead to elimination of the 10% tariff in return for some mutual concessions,” he says. The US may give case-by-case exemptions to China based on demands of US industry and eventually find an acceptable outcome based on some concessions. In the long run, even the 10% levy will elevate costs and make the US uncompetitive.
“Sparing other countries from high tariffs suggests an effort to avoid international isolation while still appearing tough,” agrees
, adding that with inflation concerns at home and strained ties abroad, this risks hurting American consumers and businesses more than its intended target.
Industry had been worried that goods shipments to the US will not only become more expensive, but that orders could stop.
The US remains a key export destination for India and is its largest trading partner with exports of $68.46 billion between April 2024 and January 2025 or about 19% of total exports. The key exports include electronics, gems and jewellery, pharma, auto components and garments and textiles.
For now, the government remains hopeful that the ongoing negotiations for the bilateral trade agreement (BTA) with the US, the first tranche of which is expected to be completed by September or October, will eventually earn India a reprieve from the reciprocal tariffs. Rather than a knee-jerk reaction, officials note that patience is of the essence.
“India is not looking to retaliate with tariff action like the EU and China, but domestic interests in sectors like agriculture and dairy will be safeguarded in the BTA,” underlines a senior official.
India’s strategy seems to be firmly pinned on a successful negotiation of the BTA with cuts on several items that are of interest to the US in the first phase, expanding trade ties with other countries, keeping a tight lid on dumping of goods by other countries such as China that could also hamper the domestic market, and extending support to exporters as and where required. There are indications that a new export promotion scheme may be announced in the coming months.
Exporters have also urged the government to extend several schemes that can help them meet working capital costs and get interest subvention. While the interest equalisation scheme ended on December 31, 2024, other export support schemes such as the RoDTEP (Remission of Duties and Taxes on Exported Products) are set to lapse on September 31.
The Impact
The first order of business for Indian companies was the immediate release of shipments waiting for despatch. All shipments to the US that were in the pipeline by April 9 were prioritised as they would not be subject to higher tariffs, says Ajay Sahai, Director General & CEO, FIEO, adding that in most cases further orders are on hold.
“The global economic outlook is fast changing. The recent trade tariff-related measures have exacerbated uncertainties, clouding the economic outlook across regions, posing new headwinds for global growth and inflation,” noted RBI Governor Sanjay Malhotra after the meeting of the Monetary Policy Committee that cut the policy repo rate by 25 basis points to 6%. The RBI has cut its growth projection by 20 basis points to 6.5% for FY26 from the previous 6.7%. Malhotra noted that higher tariffs will have a three-pronged impact—dampening spending and investment decisions of businesses and households, denting global growth that would impede domestic growth and lastly, hurting net exports.
Sahai says companies will have to wait and watch the evolving situation for the next few weeks to assess if new orders start. “The main question remains as to what condition the US economy and consumer demand will be in. Several reports suggest that the US could possibly enter a recession,” he points out, adding that retaliatory tariffs by other countries will also slow global trade and impact Indian exports.
With exports still a small part of the Indian growth engine—and exports to the US are smaller still—experts believe that the direct impact may be lower than anticipated.
A report by CareEdge Ratings says that India’s direct export loss from higher tariffs could be limited to $9-13 billion, which is 0.2-0.3% of its GDP. “India’s domestically driven economy may offer some resilience,” it noted, adding that lower reciprocal tariffs could provide the country a competitive advantage over other Asian exporters.
Nonetheless, the reciprocal tariffs add to global economic concerns. Volatility is likely to persist in global financial markets, and it remains to be seen how countries will retaliate to reciprocal tariffs, it further warned.
“With goods exports to the US at 2.1% of GDP (total) and 1.7% of GDP (excluding energy and pharma, which are exempt from tariff hikes), the direct impact will likely be less severe,” said a recent report by Morgan Stanley, which has estimated a downside risk of 30-60 basis points to its FY26 growth estimate of 6.5% for India. It warned that a slowdown in US growth and weak global trade will impact external demand. “More importantly, we expect the impact to be more pronounced through the indirect channel of weaker corporate confidence, which will dent the risk appetite and further defer the capex cycle.”
Industry, too, is gloomy and some of the worst hit sectors such as gems and jewellery, engineering goods and shrimp are reporting a loss in production and markets in the near term. Hopes are pinned on the successful conclusion of the BTA in coming months that could offer some reprieve from the high tariffs.
Pankaj Chadha, Chairman of the Engineering Exports Promotion Council, notes that engineering goods are India’s largest export to the US, valued at about $20 billion. “The sector has already been hit by the 25% tariff on steel and aluminium. We will see a $4-5 billion hit from higher tariffs on Indian exports this fiscal and there could be a reduction of 20-25% in our exports in the first year,” he says.
Kirit Bhansali, Chairman of the Gem and Jewellery Export Promotion Council, says the tariff puts at risk exports worth $10 billion to the US, which is India’s biggest market, including $5.6 billion of cut and polished diamonds and $2.54 billion of studded jewellery. “At present, we are exploring all possible solutions to safeguard our industry’s long-term interests in the US market,” he says.
An equally sombre mood prevails for India’s growing medical devices industry and shrimp exporters. (See box: Sectors Brace For ‘Liberation’ Jolt)
The silver lining is that US tariffs on India are significantly lower than those on competitors like China (104%, including the 20% tariff imposed earlier), Vietnam (46%) and Thailand (37%). Further, pharma exports remain exempt for now, although the US has indicated that it would be hit in the future.
Experts believe that this gives India a competitive advantage in sectors such as electronics, pharma and textiles and readymade garments, where the major competitors have been slapped with much higher levies.
Jayant Dasgupta, India’s former Ambassador to the WTO, agrees that for India, certain sectors like textiles and clothing and electronics could be advantageous, but the exact extent has to be seen. “While higher tariffs will be applied to China, we must realise that 90% of the components used for assembling mobile phones in India come from China. Similarly, in garment manufacturing and exports, India simply does not have the scale and capacity that competitors like China, Vietnam and Bangladesh have, although they have higher tariffs,” he points out.
Many countries, including Vietnam and Bangladesh, have signalled their intention to negotiate bilateral deals with the US that could further blunt the edge from the lower reciprocal tariffs on India and the planned BTA.
A New Approach
Despite the 90 day pause, what Dasgupta and several experts agree upon is that competitive advantage from tariffs cannot be the only way forward for India to navigate this situation. India must rethink its strategies around manufacturing and exports to build domestic resilience, introduce more reforms to make it easier to do business in the country and attract investments and be more open in trade negotiations.
“India must tackle domestic reforms—simplifying tariffs, hassle-free and just implementation of quality control orders, improving GST processes, and streamlining trade procedures. These changes are critical if India wants to make the most of global shifts, though progress may be slow,” says Srivastava of GTRI. He also advocates that India should build product value chains with China in sectors like chemicals, machinery, and electronics, fast track FTAs with countries like the EU and the UK. “India should reconsider negotiating a comprehensive free trade agreement with the United States,” he says.
Manufacturing is yet to take off even 10 years after the government launched its flagship Make in India programme, with gross value added by the sector at just about 18% of GDP, far below the target of 25%. Reviving private investments has proved amongst the most significant challenges for the government. India Inc’s capex plans are subdued in most sectors.
“The question remains whether India can fill the gap left by competing countries that have higher tariffs in the short term. Do we have the wherewithal for this and the requirements to meet such huge orders?” Dasgupta wonders. A case in point is readymade garments. While India is a huge exporter, it does not have the infrastructure to service the large orders that countries like China, Bangladesh and Vietnam have.
Mithileshwar Thakur, Secretary General, Apparel Export Promotion Council, agrees and notes that while the lower reciprocal tariffs on India give the apparel sector an advantage, scale is a challenge in readymade garments. Further, lower tariffs in countries like Turkey and Brazil, which are large apparel exporters, give them an edge, he points out.
A World Bank report released last year had noted that despite rapid overall economic growth, India’s trade in goods and services over the past decades has decreased as a share of GDP and the country’s participation in global value chains has waned.
The report had also recommended that India pursue measures like reducing trade costs further, lowering trade barriers, and revisiting FTAs and regional integration as part of its strategy to achieve the $1 trillion merchandise export target.
The government is aware of these concerns and has been working on several reform measures, including the highly anticipated proposal for deregulation and, as the Economic Survey pointed out, for the government to simply get out of the way of doing business. Efforts are under way to cut down red tape and compliances for small businesses and usher in the second generation of reforms by nudging states to work on provisions around land and labour regulations.
Regulatory technology solutions firm TeamLease Regtech notes that India’s business ecosystem is governed by 1,536 acts and rules, 69,233 compliances, and 6,618 filings.
Dasgupta agrees that more measures are needed to foster investments, including a stable policy environment where FDI will flow in easily. “A single-window clearance has been spoken about several times, but it is far from being achieved,” he points out. Clearances for land and environment, electricity connections, labour laws—all remain stumbling blocks. Enforcement of contracts is another pain point for businesses.
Rajat Kathuria, Dean of the School of Humanities & Social Sciences, and Professor of Economics at Shiv Nadar University, agrees and says that India must lower the cost of doing business. “Since our tariffs have been high, this exogenous shock in the form of reciprocal tariffs now provides us the opportunity to lower our tariffs and not anger the business community at the same time,” he says, adding that this also makes it the right time to introduce reforms.
Kathuria underlines that several domestic reforms are needed, although some, like improving logistics competitiveness, could take time. “But reforms on trade facilitation, lowering the regulatory burden, employing more government officials for regulatory easing can be done in the short term and can be very beneficial to trade and industry,” he says.
Sachin Chaturvedi, Director General, Research and Information System for Developing Countries, says India must focus on the cost, quantum and quality of production in sectors like electronics, pharma and textiles to give an edge to its exports. He also underlines that India diversify its export markets through signing of more FTAs.
Underlining the importance of predictability and rule-based order, Chaturvedi says, “India must focus on markets such as Africa and Latin America for signing FTAs. There has to be a deeper trade focus of our FTAs, apart from just superficial issues, to include a whole plethora of issues such as dispute resolution,” he says.
The next few months will no doubt be a rollercoaster for global markets and trade. But it is an opportunity for India to use America’s “Liberation Day” to usher in a fresh round of liberalisation of its own economy.
SECTORS BRACE FOR ‘LIBERATION’ JOLT
Bitter dose for Pharma?
Indian pharmaceutical exports have largely escaped the steep “reciprocal” tariffs imposed by US President Donald Trump. Pharmaceuticals have been exempted from both the 10% universal baseline tariff and the more severe 26% discounted tariff on India. But this exemption may be short-lived, as Trump has said there could be a potential reclassification of pharmaceuticals.
The Impact: A scenario analysis of seven major Indian pharmaceutical companies, each with 17–45% revenue exposure to the US, showed that if such tariffs were imposed and 40% of the cost absorbed by manufacturers, EBITDA margins for FY27 could fall by 1–2%. Companies such as Aurobindo Pharma, Zydus Lifesciences, and Dr. Reddy’s Laboratories may be significantly affected, whereas Divi’s Laboratories is expected to see minimal impact.
Agriculture and Electronics
The tariff on India’s agricultural and electronics exports could destabilise the status quo, at least in the short term. The world’s largest economy is a key importer of top agricultural items from India like seafood and rice. Data shows the US imported $2 billion worth of seafood from India in FY24, about 2.5% of all Indian exports to the US.
In electronics, while India has managed to increase its share in US imports of late, most of these items have low-to-mid level value addition, making them vulnerable. Of the total US imports from India, electronics accounted for 14.3%, worth $11 billion, in FY24.
The Impact: Shrimp producers could be hit the hardest if the 26% levy comes into force, per think tank GTRI. The tariffs could lead to a 20% drop in prices in the wholesale market.
According to Indian Cellular & Electronics Association, despite the tariffs, India is better positioned than its competitors, particularly China, Vietnam, Thailand, and Indonesia. This strategic advantage, though marginally less favourable than Brazil or Egypt at 10%, still offers India a critical near-term export competitiveness window.
Auto
The US has imposed a 25% tariff on foreign-made vehicles, which will take effect on April 3. Global automobile manufacturers are staring at job losses, price hikes, and supply chain disruptions. Domestic automakers are unlikely to face a significant impact, according to the Society of Indian Automobile Manufacturers. For auto component manufacturers, however, the tariff is likely to have severe implications.
The Impact: Analysts believe the 25% tariff could severely impact operating margins of auto component manufacturers
Steel
In FY24, India exported $475 million worth of iron and steel to the US. While the direct impact is limited, steel manufacturers fear dumping and pricing pressure in the global market.
The Impact: Analysts warn that Indian steel manufacturers could face challenges as major producers like China, Japan, and South Korea redirect their steel exports away from the US due to the tariffs.
(With inputs from Neetu Chandra Sharma, Arnab Dutta, & Astha Oriel)
@surabhi_prasad
