The United States imposed 25% reciprocal tariffs on India’s exports with impact from August 7. On August 6, the U.S. imposed a penal levy of a further 25% on India’s exports as a result of India continued to import oil from Russia and this comes into impact on August 29, 2025. The two taken collectively can weaken India’s exports to the U.S. We first study the affect of the 25% tariff and, later, the affect of the penal charges.
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 a greater price. 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 growth and exterior account. Such unilateral actions are opposite to the ideas of free and honest commerce.
Impact of reciprocal tariffs
The speedy affect of reciprocal tariffs can be on the commerce stability. Assuming that there isn’t any 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 a greater aspect, India’s exports to the U.S. can go down by 25% — that is a sharp decline. However, its affect on commerce stability is determined by how a lot the share of India’s exports to the U.S. is in whole exports. As the info for 2025-26 shouldn’t be obtainable, 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 growth 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 growth rate could also be 0.4%, and correspondingly the CAD may be diminished.
Some caveats
These estimates are, nevertheless, topic to some caveats. India just 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 shouldn’t be assessed. These might have a beneficial impact on the CAD.
We are additionally not contemplating the consequences of tariff will increase imposed on different nations which might be opponents for Indian exports, and this could average the affect on India’s exports. Further, we’re not bearing in mind any seemingly modifications within the alternate rate because of the latest U.S. commerce measures and its affect on commerce stability. 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 likewise restrict the affect of the U.S. tariffs on India’s GDP growth to some extent.
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But for 2025-26, and for the approaching years, GDP growth, even after contemplating these two elements, might nonetheless be decrease by about 0.5% than the bottom case growth forecast of 6.5%; the CAD might additionally widen by a related extent. Further, following the penalty menace, any bigger shift away from Russia on crude imports and in direction of the U.S. may need additional implications on the CAD in addition to the alternate rate and home inflation. Added to this, a rise in world oil costs and the uncertainty surrounding the world economic system might exert extra stress on the CAD and its financing. It also can impact inflation.
How can India mitigate the draw back dangers of Donald Trump’s tariffs? One choice 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 manner is, as many have instructed, to diversify the export market. But this may be tough within the quick time period. One doable manner is to take a look at our personal tariffs that we impose on our imports. Our empirical outcomes do recommend that India’s exports are negatively affected by import tariffs. The estimated elasticity with respect to import tariffs is greater than (adverse) one. With the growing import content material of our exports over time, the adverse affect of tariffs on exports growth has solely elevated. The authorities might have a look at the prevailing tariff charges and will scale back people who have an opposed impact on exports.
Impact of penal levy
The affect of the penal levy, which is one other 25%, can 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 growth rate could be fairly extreme, a discount of over 0.6 proportion factors from the bottom growth rate 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 giant 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 obtainable now for negotiation should be successfully utilised.
Reciprocal tariffs with penal levy are a clear case of utilizing tariffs to compel nations to comply with a particular coverage. India needs to work with different nations to get again to a completely different system of world commerce. While the speedy affect of the tariffs on the growth rate of India could also be managed, the continuation of this type of commerce regime won’t 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
