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Informist, Thursday, Jul. 31, 2025

 

By Shubham Rana

 

NEW DELHI – India looked like one of the better placed countries in dealing with the US on a trade agreement, but that changed completely Wednesday.

 

India was one of the first countries to start trade agreement negotiations with the US in February and US President Donald Trump on several occasions indicated that the two sides were close to a deal. When Trump announced reciprocal tariffs on US' trading partners on Apr. 2, India faced a relatively lower levy of 26% compared to other countries.

 

But Trump's announcement Wednesday of a 25% tariff on Indian goods and an additional unspecified penalty is as bad as it gets for New Delhi, with a trade deal far from conclusion. Not only is the rate of tariff higher than that levied on countries such as Vietnam, Indonesia, and Philippines, the move also aims to penalise India for its close economic ties with Russia.

 

"They have always bought a vast majority of their military equipment from Russia, and are Russia's largest buyer of ENERGY, along with China, at a time when everyone wants Russia to STOP THE KILLING IN UKRAINE — ALL THINGS NOT GOOD! INDIA WILL THEREFORE BE PAYING A TARIFF OF 25%, PLUS A PENALTY FOR THE ABOVE, STARTING ON AUGUST FIRST," Trump said in a post on his Truth Social platform.

 

The 25% duty plus penalty could significantly hurt India's exports as the US is India's top export destination with a share of nearly 20% in total outbound shipments in value terms. India exported goods worth $86.51 billion to the US in the financial year 2024-25 (Apr-Mar) and had a trade surplus of $40.82 billion, according to commerce ministry data.

 

In a note, Capital Economics said the immediate economic impact of a 25% tariff would be small as India is not heavily dependent on US demand. Capital Economics estimates that US demand drives under 2% of India's GDP. But the impact over time would be larger, it said.

 

"A 25% tariff is higher than the tariffs that Trump has announced on other Asian economies such as Vietnam (20%), the Philippines (19%), and Indonesia (19%), and so at the margin it would somewhat diminish India's appeal as an alternative to China for the reconfiguration of supply chains," Capital Economics said.

 

The Reserve Bank of India had in April lowered its GDP growth projection for the current financial year by 20 basis points to 6.5% citing global trade tensions. Downgrades by other rating agencies and multilateral bodies to India's FY26 growth forecasts have since followed. In April, Morgan Stanley said it sees a downside risk of 30-60 bps to India's growth forecast for FY26 because of the reciprocal tariffs.

 

According to Garima Kapoor, economist and executive vice president at Elara Capital, India's GDP growth estimate can see a 20 bps fall if a trade deal with the US is not signed by October. While the exact details of the tariffs remain unknown as of now, the inclusion of pharmaceuticals into tariffs "should be incremental negative for India's exports as US accounts for more than 30% of India's pharma exports," Kapoor said.

 

The tariff alone would hurt India's exports and economic activity, but Trump's attack on India-Russia ties can have far reaching implications. The US president also said he does not care "what India does with Russia. They can take their dead economies down together, for all I care." 

 

RUSSIAN CONNECTION

India and Russia have maintained close economic ties for several years now. While traditionally India has relied on Moscow for military equipment, New Delhi has turned one of the biggest buyers of Russian crude oil since Russia invaded Ukraine in February 2022.

 

India has been buying crude oil from Russia at discounted prices amid sanctions by western countries on the country after it invaded Ukraine. The Group of Seven developed nations had initially imposed a $60 a barrel price cap on Russian crude and later imposed more sanctions to try and curb Moscow's oil sales.

 

India has bought Russian oil up to $30 a bbl cheaper, though discounts have varied sharply over the past three years and have been around $4 a bbl in the recent times. The International Monetary Fund in February said India saved around $7 billion per year by importing crude oil at a discounted price from Russia.

 

Along with being India's top supplier of arms, Russia has also become India's largest crude oil supplier, accounting for around 35% of its oil imports. According to Kpler, a data analytics company specialising in shipping markets, imports from Russia were around 2.1 million bbl per day in June, marking the highest monthly volume in a year.

 

India has maintained that it is not fixated on Russian oil and will import from any country that is suitable. But moving away from Russian oil may not be enough. Washington has been pushing countries to commit to buying energy from the US as part of the trade agreements. The European Union committed to buy $750 billion of US energy products over three years as part of the trade deal with Washington.

 

During his US visit in February, Prime Minister Narendra Modi committed to increase India's energy imports from the US and make the US the leading supplier of oil and natural gas. But moving to US oil from Russia will come at a cost.

 

Economists at Standard Chartered estimate replacing 100% of oil purchases from Russia with US imports could add $4.0 billion-$6.5 billion to India's annual import bill. India imported crude oil worth $143 billion in FY25, which made up around 20% of the country's total import bill of $721 billion.

 

This cost of moving to US oil would have to be borne by the oil marketing companies or the government, unless the government allows these companies to raise retail fuel prices. But if the price increases are fully passed on to consumers, "we estimate that the resulting 1.5-2.5% increase in retail fuel prices would push up headline CPI inflation by 3-5 bps," Standard Chartered said in a report last week.

 

"While the macro impact of such a shift appears manageable on a standalone basis, the actual impact would depend on how crude oil prices reacted to lower Russian crude oil supply globally," economists at Standard Chartered said. "Our estimate suggests that a USD 10/bbl increase in crude oil prices could widen India's trade deficit by 0.4% of GDP, with the equivalent fiscal cost (assuming the increase is fully absorbed by the government) or an inflationary impact of 13-15 bps (assuming the consumer bore the cost)."

 

To make matters worse, Trump late Wednesday cited India being part of BRICS as a reason for the tariff and the penalty. "It's also BRICS, which is basically a group of countries that are anti-US and India is a member of that. It is partially BRICS and it is partially the trade situation," Trump said. The US president has threatened to impose an additional 10% tariff on BRICS countries, including India.

 

India and Russia are also part of the BRICS group of nations, which Trump calls "anti-US". Formed in 2009, BRICS nations aim for a new global reserve currency as an alternative to the US dollar. Trump has called BRICS "an attack on the dollar". On Wednesday, Trump said, "We are not going to let anybody attack the dollar."

 

At present, not much work is happening on the BRICS currency, RBI Governor Sanjay Malhotra had said last week. "As of now, there's not much work happening on a BRICS currency. The dollar is going to be here for a longish time because you need some universal cross-border currency. It is serving the purpose," Malhotra said.

 

SAVER DEAL?

Experts believe Trump's latest tariff announcement could just be a negotiating tactic ahead of trade agreement talks in August. "And this 25% rate – payable from 1st August, according to Trump – is probably not the end of the story," Capital Economics said. Trump Wednesday labelled India's non-tariff barriers as "strenuous and obnoxious", but also referred to India as a "friend".

 

According to Kapoor of Elara Capital, any "hotchpotch deal which would have compelled India to give concessions to its agriculture and dairy sector may have had much deeper ramifications politically, socially, and eventually on livelihoods."

 

"A well-negotiated deal that addresses all aspects of trade, investment and tariff and non-tariff barriers by September-October 2025 is likely to yield long-term benefits than a hurried deal," Kapoor said in a note.

 

The Indian government has responded to Trump's tariff announcement by saying that it is studying the implications and is committed to concluding the bilateral trade agreement. The Indian government said it attaches the utmost importance to protecting and promoting the welfare of farmers, entrepreneurs, and micro, small, and medium enterprises. 

 

Dealing with Trump has been difficult for almost all countries. India's position went from comfortably placed to one of the worst-hit in a few months. And things seem to be escalating quickly. After Trump's comments on India's relationsip with Russia, US Treasury Secretary Scott Bessent Thursday said that Washington's trade team has been frustrated with New Delhi. Bessent added that he doesn't know what is going to happen with India's trade deal.

 

The extent of impact on the Indian economy will depend on how and when a trade deal with the US shapes up. With the 25% tariff coming into effect from Friday, the clock is ticking for India.  End

 

US$1 = INR 87.59

 

Edited by Vandana Hingorani

 

 

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