Trump’s Tariff Threats: How Should India Respond?

Trump's decision to impose a 25% ‘reciprocal’ tariff on US imports from India, along with an additional 25% penalty over India’s purchase of crude oil and military equipment from Russia, has triggered serious concerns across our country’s export sectors and the job market. 

The US is pressuring New Delhi to reduce tariffs on American agricultural and dairy products, overlooking India’s structural vulnerabilities and its reliance on these sectors. 

Whether this pressure tactic is intended only to deter India’s trade with Russia or is part of Trump’s long-term trade strategy toward India remains to be seen. This article contextualises India’s tariff barriers on farm imports from the US and their importance. It also highlights the need for immediate policy responses and a long-term strategy to mitigate the impact of US tariffs on Indian industries.

India-US trade relations

The US is India’s largest export market and third-largest trading partner, with a total trade volume of $130 billion – behind only the Gulf Cooperation Council (GCC) at $161 billion and the European Union at $135 billion. 

India has witnessed a 300% increase in its trade surplus with the US, rising from $11 billion in 2013 to $45 billion in 2024. The US is one of only two major trading partners with which India runs a trade surplus, the other being the European Union, with a surplus of $16 billion.

Last year, India exported nearly $86 billion worth of goods to the US. The goods exports to the US account for approximately 20% of India’s total outbound trade. Key Indian exports to the US include textiles and apparel ($10.5 billion), gems and jewellery ($9.9 billion), and pharmaceuticals ($8.7 billion), with the US accounting for nearly 40% of India’s total pharmaceutical exports. 

Other significant items in India’s export basket to the US include agricultural products ($6.6 billion), electronics products ($7.2 billion), petroleum products ($5.8 billion), and engineering goods ($1.6 billion).

On the other hand, India’s imports from the US total only about $40 billion (with mineral fuels and oils at $16 billion). These trade figures place India in a slightly advantageous position compared to the world’s largest economy, something that doesn’t appear to sit well with US President Donald Trump.

Possible tariff impact

In Trump’s new tariff regime, India faces the highest tariff rate in Asia after China. Its other competitors – Bangladesh, Malaysia, and Vietnam – are facing a tariff rate of 15-20%. 

The new tariffs will make Indian goods more expensive in the US market, reducing their price competitiveness, particularly affecting the labour-intensive industries like textiles, which will now face a higher tariff rate of around 60%. 

The impact is also likely to be higher for items facing a higher price elasticity of demand – which measures how sensitive customers are to changes in commodity prices.  

To be clear, higher prices in the US market on account of tariffs are going to be shared between three parties: the Indian exporter, the US importer, and the consumer. How this plays out will vary by product.

According to a 2017 research report by the International Monetary Fund (IMF), the long-run price elasticity of demand for Indian goods in the international market was estimated at -0.9, meaning a 1% increase in the price is associated with a 0.9% decline in demand. For manufacturing exports, the elasticity was even higher at -1.1. 

In the short run, however, these elasticities were lower, at around -0.5, reflecting the influence of contractual obligations and structural rigidities. The price elasticity for the pharmaceutical industry is typically lower, at around -0.3, indicating that a potential tariff hike would have only a limited impact on pharma exports, given the essential nature of these products. 

That is one of the reasons why a few items – such as pharmaceutical products – have reportedly been exempted from the new tariffs, as taxing them would have adversely affected US consumers. 

According to the Global Trade Research Initiative (GTRI), India’s overall exports to the US could decline by nearly 30%, falling from $86 billion to around $60 billion. Such a projected decline could significantly impact India’s formal job market, as key export-oriented sectors are major employers of young workers, particularly in manufacturing hubs. 

This could further worsen youth unemployment, already at an alarming 13.7% in rural areas and 17.7% in urban areas, underscoring the need for a strong government response to support these industries in the face of rising tariff threats. 

To safeguard its long-term interests, India should remain firm and avoid yielding to such pressures, while continuing to protect its farmers.

India does have some bargaining counters. First, its services exports, particularly long-distance IT services and the Global Capability Centres established in hubs like Bangalore and Hyderabad, are critical to the operations of US companies. 

Second, India could signal to the US that, if it must accept higher tariffs on goods (after negotiating down those proposed by Trump), it would seek greater opportunities for Indian physicians to provide medical services remotely to US patients. This would, of course, require negotiations to ensure that Indian medical degrees are recognised as equivalent.

Limiting market access for foreign players

India currently imposes an average tariff of 17% on imports from the US compared to the previous US tariff of 3.3% on imports from India. Agricultural goods from the US are facing even a higher tariff rate of up to 39%. These tariff rates on US goods may seem high on the surface, but the Union government has strong reasons for maintaining them and even raising them further in response to Trump’s 50% tariff threat. 

India remains heavily dependent on agriculture, with nearly 46% of its workforce – around 280 million people – engaged in the sector for their livelihood, even though it contributed only 14.7% to the country’s GDP in 2023-24. 

Protecting agriculture from foreign competition is crucial not only for safeguarding the livelihoods of millions of less-educated manual labourers, but also for ensuring food security for the poor.

Indian farmers are unlikely to compete with their American counterparts due to significant gaps in technological adoption and scale of production. The average farm size in India is just 2.67 acres, compared to 187 acres in the US. Similarly, the average dairy farm size in India is around five animals as compared to around 300 animals in the US. Moreover, previous studies report that less than 50% of farming in India is mechanised, compared to 95% in the US, leading to significant inefficiencies and a productivity disadvantage for Indian farmers.

This gives American producers a clear advantage in minimising production costs through economies of scale, enabling them to sell at lower prices. Consequently, it poses a serious threat to the Indian farmers in our domestic market, justifying the higher tariffs that India imposes on imports from the US.

Trump is pushing for market access and tariff reductions on a wide range of products, including fruits, nuts, milk powder, butter, livestock feed and genetically modified crops such as corn, rice and wheat. Conceding to these demands could expose nearly 85% of India’s agricultural sector to US competition, posing risks to food security and threatening the livelihoods of millions of Indians. 

Policy options

As an immediate policy response, the government could provide financial relief to exporters – particularly in the MSME sector which accounts for 40 % of the total exports – by subsidising interest rates on export-related credit. 

This would require reviving the Interest Subvention Scheme, first introduced in 2015, to offer interest subsidy of 3% to eligible exporters. The scheme was discontinued in December, 2024. 

Similarly, extending the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme and the Rebate of State and Central Taxes and Levies (RoSCTL) can provide an additional layer of support. Moreover, Indian negotiators must make every effort to persuade the US to lower its tariffs. The Union government should also collaborate with state governments to assist exporters during these challenging times. 

In the medium and long term, India must diversify its export markets by strengthening its engagement and expanding Free Trade Agreements with ASEAN countries, West Asia and Africa. These are regions where significant opportunities remain untapped. This will reduce its overdependence on a few major economies, enhance resilience to external uncertainties, and capitalise on opportunities in emerging markets.

Irfan Ahmad Sofi is Incharge Head, Department of Economics, Islamic University of Science and Technology, Kashmir.

Santosh Mehrotra is a Visiting Professor at University of Bath U.K. 

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