Explainer: What do Donald Trump's 25% tariffs on India mean? What happens if they stay…
US President Donald Trump has hit India with a 25% tariff rate ahead of his August 1 reciprocal tariff deadline. India and the US are working on a trade deal but no interim agreement has been finalised.
With this India has become the latest addition to the list of countries subjected to higher tariffs under Trump's "Liberation Day" trade strategy, which seeks to restructure American trade partnerships through enhanced reciprocal arrangements.
The revised US tariffs will affect India's export of goods to America, projected at approximately $87 billion in 2024. This includes labour-intensive sectors including apparel, medicines, gems and jeweler, and petrochemical products.
The trade imbalance between the United States and India is at $45.7 billion, favouring India.
US Tariffs on India
: What did Trump announce?
Taking to social media platform Truth Social, Trump said, 'Remember, while India is our friend, we have, over the years, done relatively little business with them because their Tariffs are far too high, among the highest in the World, and they have the most strenuous and obnoxious non-monetary Trade Barriers of any Country.
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Also, 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.
THANK YOU FOR YOUR ATTENTION TO THIS MATTER. MAGA!
The additional penalty for trade with Russia remains unclear for now.
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Donald Trump imposes 25% tariffs on India! How does India compare to other economies like China, Japan, Vietnam on the rate list? Check details
What India Has Said About the 25% tariff
In a statement, the Ministry of Commerce and Industry said, "The Government has taken note of a statement by the US President on bilateral trade. The Government is studying its implications."
"India and the US have been engaged in negotiations on concluding a fair, balanced and mutually beneficial bilateral trade agreement over the last few months. We remain committed to that objective. The Government attaches the utmost importance to protecting and promoting the welfare of our farmers, entrepreneurs, and MSMEs.
The Government will take all steps necessary to secure our national interest, as has been the case with other trade agreements including the latest Comprehensive Economic and Trade Agreement with the UK," India has said.
How will the 25% tariffs hit India?
Agneshwar Sen, Trade Policy Leader, EY India says, 'The decision to raise the US tariff to 25% on Indian exports is an unfortunate development, particularly given the strong strategic partnership that has been steadily built between India and the USA in recent years.
If this tariff is sustained, this move may directly affect key sectors such as marine products, pharmaceuticals, textiles, leather, and automobiles, where bilateral trade has been especially robust. However, it's important to note that both countries remain positively engaged in active negotiations with the US team expected in India later in August to finalize a comprehensive trade agreement,' he said.
'I am confident that, considering our shared interests and history of cooperation, the two sides will be able to address these contentious issues constructively and arrive at a mutually beneficial agreement in the very near term,' he added.
Garima Kapoor, Economist and Executive Vice President at Elara Capital sees the 25% tariff as a negative development, and one that may shave off 20 basis points from India's GDP growth if the tariff rate stays at that level.
'The exact details of the tariffs on the exempted items such as pharma and the ones that were charged at a differential rate such as iron, steel and auto is unknown as of now, but inclusion of pharma into tariffs should be incremental negative for India's exports as US accounts for more than 30% of India's pharma exports.
If no deal is signed by Sept-October, we see a downside to the full year GDP growth estimate for India by 20 basis points,' she said.
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Agricultural economist Ashok Gulati is of the view that the tariff will significantly affect India's seafood exports, particularly shrimps.
The decision by US President Donald Trump to levy higher tariffs on Indian products is "very bad" and "shocking", noted Gulati, who had anticipated a more modest increase of 10-15 per cent.
"This clearly shows Trump is unpredictable and punitive," he told PTI.
The economist indicated that this development will substantially affect India's shrimp trade, whilst Ecuador stands to benefit due to its reduced tariffs and closer proximity to the United States.
The impact of increased US tariffs will extend beyond shrimps to affect India's textile sector as well.
Gulati further added that the benefits acquired through the India-UK free trade agreement would be offset by these elevated US tariffs.
Earlier this month, an SBI Research report said that even if India is unable to secure a trade deal as per its desire, the impact is likely to be limited. 'With India's service exports reaching a new high each year, a record $387.5 bn in 2024-25 driven by sectors like IT, financial and business services, our total exports are not likely to get significantly impacted,' the report said.
India's Exports Uncompetitive?
The most worrying bit about the 25% tariff is not the figure itself, but the fact that India's Asian peers have managed to secure deals with the Trump administration that have lower duties.
Japan will pay 15%, Vietnam will pay 20% and Indonesia has a tariff of 19%. This will hit India's competitive advantage for US exports.
India is actually looking to secure a trade deal that will give it preferential access to US markets compared to peers.
Talking about the India-US trade deal negotiations Commerce Minister Piyush Goyal recently said, '...what is important is to get preferential market access over our competitors, our peers.'
Garima Kapoor of Elara Capital says, 'The 25% tariff rate is certainly a negative development as it compares to lower rates for peers such as Vietnam, Indonesia and Philippines which compete with India in a similar category of labour-intensive products and electronic goods.'
But is the 25% tariff rate all bad?
Ajay Srivastava from Global Trade Research Initiative explains, 'Some sectors like our top exports to the US are pharmaceuticals, medicines, so Europe will be paying 15%, but European medicines are expensive, high-end proprietary medicines.
We are into generics. So if we are paying 25%, I don't think much of the generic market exports to India, exports to the US from India will be impacted.'
Regarding smartphone exports, particularly iPhones, he noted that with only China and India being major exporters to the US market, the 5% duty differential (China at 30% and India at 25%) would not significantly affect trade patterns.
Garima Kapoor believes a hasty deal would have not helped.
'On the positive side, it is pertinent to note that 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,' she says.
'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.
The India-UK deal template which gave concessions to auto and opened public procurement sector has shown that India is willing to shed its protectionist tag in sectors where it doesn't impact the marginal producer, which is a huge departure from its earlier stance,' she adds.
25% Trump Tariffs temporary in nature?
As trade deal talks appeared to have hit a stalemate with the next round expected in August-end, it appears that India was already bracing for 20-25% tariffs from the Trump administration.
"Talks are progressing well," a government official had been quoted as saying by Reuters, adding Trump could issue a tariff order in a "worst-case scenario".
"But, we assume it would be a temporary measure, considering the five rounds of trade talks that have taken place. A deal will soon be worked out,' the official had said.
As US officials visit India for the sixth round of talks in August-end, there are hopes that a trade deal will be finalised in the coming months.
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