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 an extra 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 slender this commerce surplus, the U.S. seems to focus each on India’s exports and imports. While a 25% reciprocal tariff may hamper India’s exports, the penalty may 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 value. While the U.S.’s measures may scale back the commerce hole between the 2 international locations, 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 rapid affect of reciprocal tariffs could be on the commerce steadiness. Assuming that there isn’t any affect on imports from the U.S. (aside from a restricted diversification of oil imports from Russia to the U.S.), tariffs may 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 steadiness depends upon how a lot the share of India’s exports to the U.S. is in complete exports. As the information for 2025-26 will not be obtainable, the implications of this anticipated drop in U.S. exports is labored out for 2024-25, ex put up.
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 totally different from these estimates for 2024-25, had the tariffs been efficient from the start of the yr. However, within the present yr (2025-26) 4 months are behind us, the decline in GDP growth rate could also be 0.4%, and correspondingly the CAD can also be lowered.
Some caveats
These estimates are, nonetheless, topic to some caveats. India lately signed a complete financial and commerce settlement with the United Kingdom, whereas negotiations are underway with the European Union and different main international locations and their affect on exterior account will not be assessed. These might have a beneficial impact on the CAD.
We are additionally not contemplating the results of tariff will increase imposed on different international locations which might be opponents for Indian exports, and this will reasonable the affect on India’s exports. Further, we’re not considering any probably modifications within the trade rate as a result of latest U.S. commerce measures and its affect on commerce steadiness. Indeed, the rupee-U.S. greenback depreciated sharply and was hovering over ₹87.5 since reciprocal tariffs have been imposed. The new commerce agreements in addition to rupee depreciation may assist slender the CAD a bit and in addition 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, may nonetheless be decrease by about 0.5% than the bottom case growth forecast of 6.5%; the CAD may additionally widen by a related extent. Further, following the penalty risk, any bigger shift away from Russia on crude imports and in the direction of the U.S. may need additional implications on the CAD in addition to the trade rate and home inflation. Added to this, a rise in world oil costs and the uncertainty surrounding the world economic system may exert extra stress on the CAD and its financing. It can even 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 means is, as many have advised, to diversify the export market. But this might be troublesome within the brief time period. One doable means is to have 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 (unfavorable) one. With the growing import content material of our exports over time, the unfavorable affect of tariffs on exports growth has solely elevated. The authorities might have a look at the prevailing tariff charges and should scale back people who have an antagonistic impact on exports.
Impact of penal levy
The affect of the penal levy, which is one other 25%, could 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 full affect on India’s growth rate will be fairly extreme, a discount of over 0.6 proportion factors from the bottom growth rate of 6.5% within the present yr. To keep away from the penal levy, India has to carry to the eye of the world at massive the inequity of the choice. It is extremely discriminatory. There are many different international locations which import from Russia excess of what India does. The interval of three weeks that’s obtainable now for negotiation have to be successfully utilised.
Reciprocal tariffs with penal levy are a clear case of utilizing tariffs to compel nations to observe a particular coverage. India needs to work with different nations to get again to a totally different system of world commerce. While the rapid affect of the tariffs on the growth rate of India could also be managed, the continuation of this sort of commerce regime won’t be within the pursuits of all international locations 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
Published – August 09, 2025 12:16 am IST