Trump’s Tariff Policy: How It Impacts India’s Economy

US President Donald Trump's recent announcement of new tariffs has created a stir in the global trade community. His "Liberation Day" policy, revealed on April 2, 2025, imposes a base 10% tariff on all products imported into the US, along with reciprocal tariffs against every trading partner. These tariffs are part of Trump’s effort to reduce the US's $1.2 trillion trade deficit and turn the country into a global manufacturing hub, fulfilling his “Make America Great Again” (MAGA) agenda. However, this strategy could backfire and destabilize global trade.

Starting from April 9, 2025, countries including China, Vietnam, Thailand, Indonesia, Japan, the European Union, Bangladesh, and India will face hefty tariffs. For India, the tariff on exports to the US will rise to 26%, based on the country’s $46 billion trade surplus with the US. While Trump claims this action is necessary for fair trade, it is likely to have significant economic consequences for India and its global trade partners. India’s GDP could see a dip of 0.3% to 0.5%, and the global economy could shrink by 1% to 1.5%.

However, not all sectors in India will be equally affected by the new tariffs. The pharmaceutical sector, which exports $9 billion worth of products to the US, will benefit from tariff exemptions. This move aims to prevent higher drug prices and shortages in the US. Leading pharmaceutical companies like Sun Pharma, Lupin, and Dr. Reddy's will see a boost in the short run. But Trump has warned that new tariffs might be imposed soon at even higher rates, which could threaten this exemption.

The oil and gas industry in India will also escape the tariff’s impact. Crude oil, refined products, and natural gas exports, valued at $6 billion, will not face the new tariffs. This is likely a result of the US’s commitment to increase energy exports to India, following a pledge made by Prime Minister Modi.

One of the hardest-hit sectors will be gems and jewelry. With tariffs on this industry now reaching 31.5% to 39.5%, up from 5.5% to 13.5%, Indian exports to the US will become more expensive. This will likely reduce demand for Indian jewelry, potentially leading to a drop in prices in India. Additionally, India’s gem and jewelry sector will face tough competition from the US-Mexico-Canada trade agreement, which offers lower tariffs on similar products.

The medical devices sector will also feel the impact, with a reduction in exports to the US. In 2024, India exported $714 million worth of medical devices, and the new tariffs could hurt this low-margin, high-volume industry. Similarly, marine exports, especially shrimp, will be affected by the new tariffs. Ecuador, with a lower tariff rate, is expected to become a more competitive supplier than India.

On a more positive note, India’s textile industry will face lower tariffs than many of its competitors. With a tariff of 26%, India has an advantage over countries like Vietnam (46%) and Bangladesh (37%). However, exporters should be cautious and explore alternative markets to reduce dependence on the US.

The auto parts industry will also experience negative effects, with the new tariffs raising the cost of Indian exports by 26%. The solution lies in negotiating lower tariffs through Bilateral Trade Agreements (BTA) and seeking more incentives through the production-linked incentive (PLI) scheme.

While India will certainly feel the effects of Trump’s new tariffs, the overall impact might not be as severe as anticipated. India should focus on securing favorable BTAs, managing the risk of “dumping” by China and other countries, and preparing for the potential impact of US inflation and recession. While Trump’s policy aims to boost US manufacturing, it will have significant ripple effects on global trade, and India must adapt to these changes strategically.