Understanding Tariffs and Their Impact on India

What Are Tariffs?

Tariffs are taxes governments levy on foreign imports to make the goods more expensive. Imagine that it’s like if you’re trading stickers with a friend, and every time you take one he wants you to give him one more candy – this extra cost is like a tariff. Tariffs are basically in-between prices in global trade – levies imposed on imported goods to make them more expensive, discouraging people from purchasing them, and having a spillover effect on businesses that depend on international markets.

Types of Tariffs:

•Volume Tariffs – A Fixed charge per unit. For instance, a $500 tariff on each imported car.

•Ad-Valorem Tariffs – A fixed percentage of the product’s value A 5 percent tariff on a $20,000 car adds up to an extra $1,000 in taxes.

Why Are U.S. Tariffs a Challenge for India?

1. Fewer Exports

U.S. tariffs are higher, which has made Indian goods more expensive for American consumers, resulting in a fall in exports. These tariffs could shrink India’s exports to the U.S. by 3-3.5% according to SBI Research. Should textiles or drugs become expensive, customers could easily run to Vietnam or Bangladesh for substitutes. A decline in exports depresses revenues for companies, triggering job cuts and less production. The tariffs on goods such as cotton garments and synthetic fabrics are straining India’s textile industry, a major component of exports. Pharmaceutical companies that provide about 40 percent of generic drugs in the United States may find lower demand if tariff barriers increase. As a result, businesses might have to cut costs, affecting employment and investment in these industries.

2. Struggles in the Car Industry

The Indian automobile sector heavily depends on imported components from the U.S., Japan, and South Korea. Higher tariffs on these parts make Indian cars more expensive, reducing their global competitiveness. If an auto part incurs a 10% tariff, the production cost of Indian cars increases, impacting both manufacturers and buyers.

Additionally, major Indian automakers such as Tata Motors and Mahindra, which export vehicles to the U.S., may see reduced demand if their vehicles become costlier due to tariffs. The electric vehicle (EV) sector, still in its growth phase, is also affected, as batteries and key components rely on imports. If tariffs remain high, India may have to accelerate domestic production of these parts to reduce dependency on global suppliers.

3. Increased Medicine Prices

India is a leading producer of affordable medicines, especially generic drugs. Higher U.S. tariffs can make Indian medicines costlier for American consumers and reduce sales for Indian pharmaceutical companies. The World Bank suggests that if tariffs rise, Indian firms may struggle to maintain their competitive pricing, affecting global healthcare access.

For example, Indian companies like Sun Pharma and Dr. Reddy’s Laboratories supply a significant portion of essential medicines to the U.S. market. If their prices increase due to tariffs, American consumers may face higher medical costs, while Indian manufacturers may lose out on market share to competitors from China or Europe. This could also impact India’s reputation as the “pharmacy of the world.”

How India is Responding

1. Expanding Trade Partners

To lessen dependence on the U.S., India is diversifying its export markets, strengthening trade with the Middle East, Europe, and Africa. For instance, agricultural exports to Saudi Arabia and the UAE have increased, while partnerships in technology with European nations have been expanding.

The government is actively negotiating trade deals, such as the Comprehensive Economic Partnership Agreement (CEPA) with the UAE and discussions with the UK for a free trade agreement (FTA). By reducing reliance on a single market, India can mitigate risks associated with tariffs imposed by the U.S.

2. Adjusting Tariffs

India may consider reducing its tariffs on U.S. goods such as electronics and agricultural products (like almonds and apples) to maintain positive trade relations. However, lowering tariffs on items like iPhones could harm domestic manufacturers, requiring careful policy balancing.

For instance, reducing tariffs on American agricultural goods might benefit Indian consumers but could negatively impact local farmers who compete with these imports. The government must strike a balance between keeping trade relations strong and protecting domestic industries from foreign competition.

3. Negotiating Trade Agreements

India and the U.S. are in discussions to strengthen their trade ties, aiming to boost bilateral trade to $500 billion by 2030. Negotiations focus on reducing trade barriers and improving supply chain collaboration, particularly in technology and pharmaceuticals.

The Trade Policy Forum (TPF) meetings between both nations highlight efforts to resolve issues related to market access and intellectual property rights. By fostering stronger economic relations, India hopes to ease tariff burdens and create a more favorable business environment.

Who is Most Affected?

1. Farmers and Factory Workers

A fall in exports leads to financial strain on industries like textiles and agriculture. Rice growers, for example, could face job losses if the U.S. reduces imports due to high tariffs.

Many small and medium enterprises (SMEs) that rely on exports may also struggle to stay afloat. These businesses, which contribute significantly to employment in India, could see declining profits, leading to layoffs and reduced economic activity.

2. Global Trade Networks

Tariffs create ripple effects, slowing global trade. When one country raises tariffs, others retaliate, leading to strained supply chains and increased costs worldwide.

India is not the only country affected—many emerging economies that rely on exports to the U.S. face similar challenges. This can lead to shifts in global trade patterns, where countries seek alternative partners or renegotiate trade agreements to remain competitive.

The Bigger Picture

1. Impact on India’s Economy

•If India retaliates with its own tariffs, GDP could shrink by 0.5%.

•Lowering tariffs slightly could lead to 0.1% economic growth.

As global markets adjust to changing tariff policies, India must adapt by enhancing its manufacturing capabilities and reducing reliance on imports for key sectors like electronics and automobiles.

2. India-U.S. Trade Balance

•Exports to the U.S. in 2023: $92 billion

•Imports from the U.S.: $155 billion

•Trade deficit: $63 billion

A widening trade deficit indicates the need for India to boost high-value exports and improve domestic manufacturing efficiency to compete with international markets.

What’s Next for India?

1. Exploring New Markets

India is expanding its trade in Southeast Asia and Africa, focusing on growing economies like Indonesia and Nigeria. Strengthening regional trade agreements, such as the Indo-Pacific Economic Framework (IPEF), can provide new opportunities for exporters.

2. Strengthening Tech & Pharma Ties

India is deepening collaborations with the U.S. in semiconductors and pharmaceuticals to boost innovation and improve supply chains. The government is also investing in initiatives like the Production-Linked Incentive (PLI) scheme to support domestic manufacturing in these high-tech industries.

Key Takeaways

•Tariffs Increase Costs: Higher import taxes make goods expensive, impacting consumers and businesses.

•India’s Counteraction: The country is reducing reliance on the U.S. while negotiating better trade terms.

•Global Cooperation Matters: A balanced approach to tariffs benefits all nations and fosters economic growth.

In summary, while U.S. tariffs pose challenges for India’s exports and economy, strategic planning, market diversification, and diplomatic negotiations can help India mitigate these effects and secure long-term trade stability. By focusing on enhancing domestic production, exploring new markets, and fostering stronger trade relations, India can build a more resilient economy in the face of evolving global trade dynamics.

Sources:  

1. Badri Narayanan’s study on automobile tariffs (GTAP model).  

2. Moneycontrol article on Trump’s reciprocal tariffs (Feb 2025).  

3. SBI Research on export drops (3-3.5%).  

4. ICRIER report on past tariff reforms.  

5. IND-US Reciprocal Tariffs report ($500 billion trade goal).  

6. World Bank data on medicine exports.