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Informist, Tuesday, Aug. 12, 2025

 

By Krity Ambey

 

NEW DELHI - Clouds of uncertainty have surrounded India's external landscape after the country's top export destination – the US - announced a 50% tariff on Indian goods. Three potential scenarios may unfold for India's shipments to the US: a sharply higher duty of 50% from Aug. 27, continuation of the current 25% reciprocal tariff if New Delhi commits to cutting Russian imports, or the most optimistic tariff rate of 15% under a bilateral trade deal.

 

For context, around 55% of India's exports to the US are now subject to a 25% reciprocal tariff, as the White House has exempted pharma, energy, and electronics from the additional tariffs.

 

In 2024-25 (Apr-Mar), India exported $86.51 billion worth of goods to the US and had a trade surplus of $40.82 billion. In the current year, the additional tariff on 55% of exports to the US poses a risk to nearly $50 billion of Indian goods from labour-intensive sectors such as chemicals and fertilisers, textile and apparel, gem and jewellery, shrimp and seafood, furniture and beddings, and machinery and mechanical appliances, among others.

 

The US' weighted average tariff rate for Indian goods was 2.8?fore US President Donald Trump announced additional tariffs over and above this rate. Since Thursday, around 55% of Indian goods attract an average tariff of at least 28%, which is likely to rise to 53% from Aug. 27. Shrimp and seafood, machinery and mechanical appliances, and gem and jewellery exports, which attracted close to only 2% tariff earlier, are worst-hit with an expected duty of over 50%. US also accounted for half of India's total exports from these sectors.

 

India may be able to retain only 20-25% of its exports to the US if the 50% duty takes effect on Aug. 27, according to Federation of Indian Export Organisations Director General Ajay Sahai. This may cut India's exports to the US to a mere $17 billion to $21 billion from an annual average of $80 billion in the last four years. Further, if India's import basket from the US remains unchanged, India's trade surplus could turn into a deficit.

 

Due to the 50% tariff, the US' share in India's export basket may fall to 5% from nearly 20%. Since Washington's announcement of the additional tariff on India, the government has been holding consultations with exporters and has suggested they should explore new markets, which can only be a medium-term to long-term strategy. In the near term, however, a sharp drop in shipments to the US could pull India's total annual exports below $400 billion for the first time in the last four years. 

 

SECOND SCENARIO

If, on other hand, New Delhi commits to cutting imports of Russian oil, the duty on Indian exports to the US may be retained at 25%. Trump has said that he raised the duty on Indian goods to 50% to penalise New Delhi for its purchase of oil and defence equipment from Russia. 

 

India has procured crude oil from Russia at a discounted rate after the US and other western nations imposed sanctions on Russia for its invasion of Ukraine. Russia has been the top source of crude oil imports for India since FY23, with a twelvefold jump in oil shipments in that year. Russian crude oil accounted for a quarter of India's total crude oil imports in each of the last two years, up from a mere 2.7% in FY22.

 

While there is lack of clarity on the kind of discount India gets on its purchases of Russian crude oil, the International Monetary Fund estimates India saved $7 billion per year in FY23 and FY24 due to these oil imports with discounts as high as $40 per barrel. Nomura estimates this discount has recently fallen to as little as $2.2 per barrel. 

 

Cutting oil imports from Russia may add $1.5 billion to India's import bill, according to Nomura. But a bigger risk is the secondary impact of India's excess demand, leading to higher oil prices globally, Nomura said in its report. Every dollar rise in global crude oil prices could add a cost of $1.8 billion to India's import bill, the agency added. A rise in global crude oil prices, which also has a cascading effect on inflation, may be detrimental for other net oil importing nations that do not source oil from Russia. To a large extent, these cost increases are likely to find their way back to US consumers, which has been a big argument in the US against Trump's tariffs.

 

Meanwhile, even after New Delhi's commitment to cut Russian oil imports, Indian goods would attract a 25% tariff in the US. Experts see India losing $20 billion to $30 billion in exports to the US if the extra tariff continues at 25%. While the share of US may fall to 14% in total exports from 20%, India may still be able to maintain a trade surplus of at least $5 billion with the US if the import basket remains unchanged. But with a rise in import bill and a drop in exports, until Indian exporters find an alternative to the US, India's overall trade deficit may widen by at least $20 billion.

 

"But can New Delhi really avoid the doubling of Trump's tariffs by cutting Russian oil imports," a former commerce ministry official and founder of think-tank Global Trade Research Initiative, Ajay Srivastava, asked rhetorically. Trump's tariff announcements for India are mere pressure tactics to get a disproportionately beneficial trade deal, Srivastava said.  

 

BEST BET

The trade deal negotiations between New Delhi and Washington have hit a near-deadlock over the US' demand to get access to India's politically and socially-sensitive farm and dairy sector. New Delhi has always maintained a protective stance on its farm and dairy sector, but the US wants to push genetically-modified crops and dairy products into India under the deal. New Delhi is unwilling to yield to these demands.

 

The next round of negotiations between India and the US is likely to begin on Aug. 25, just two days before the US' tariffs rise to 50%. Assistant US Trade Representative Brendan Lynch is expected to lead a delegation of officials to New Delhi for a five-day long trade deal negotiation. 

 

Provided the issues between the two parties are resolved at the upcoming round of negotiations, India can only negotiate a lower extra tariff rate--over and above the duty Indian goods attracted in the US before Trump's regime--with the US under the trade deal. The irony with Trump's trade deals is that the tariff rates agreed under these are higher than the tariffs on countries with most-favoured nation status. The most-favoured nation tariff rate is the standard tariff a country applies to imports from all World Trade Organization members, unless a trade agreement is in place.

 

Trump has agreed to an additional tariff of 10% to 20%, over and above the most-favoured nation tariff, with countries which have signed a deal with the US so far. Benchmarking against these trade pacts, the most optimistic extra tariff India may be able to negotiate with the US is 15%, Srivastava said. 

 

"The Indian industry can live with an extra tariff of 15%," FIEO's Sahai said. The additional 15% tariff will certainly hurt the profit of exporters but at least India will have a tariff advantage over its Asian competitors, Sahai added. Currently, with a 50% tariff, India stands nowhere vis-a-vis competition. The US has designated a 30% tariff for China, 20% for Vietnam, and 19% for both Indonesia and the Philippines. 

 

Even under the most optimistic trade deal, the average duty on Indian goods in the US would be nearly 18%. But Indian exporters would still be able to absorb the rise in cost with some support or incentive from the government, Sahai said. Under this scenario, India's exports to the US may maintain their growth momentum but the only caveat is that this should not come at the cost of opening the farm sector. Indian exports to the US grew 11.6% in FY25.  End

 

US$1 = INR 87.64

 

Edited by Akul Nishant Akhoury

 

 

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