US Tariff on India and its Effects

Why in News?

Recently, US president has announced a 25% additional penalty on Indian goods, for continuing to purchase oil from Russia, taking the total baseline tariff to 50%.

What are reciprocal tariffs?

• Definition – It is a tax or trade restriction that one country places on another in response to similar actions taken by that country.
• Implementation – If one country raises tariffs on goods from another, the affected country might respond by imposing its own tariffs on imports from the first country.
• Purpose – This response is meant to protect local businesses, preserve jobs, and fix trade imbalances.
• Impacts – It can lead to a back-and-forth increase in trade barriers, potentially resulting in a trade war that negatively impacts both economies.
• It can disrupt supply chains, raise prices for consumers, and slow down economic growth.

How US imposes reciprocal tariffs?

• Section 232 – It allows the US department of Commerce to investigate and impose additional tariffs if the import of the goods threaten national security.
• Tariffed goods 

• Exempted items – Pharmaceuticals, Electronics & Semiconductors, Energy Products and Critical Minerals.
• These exempt items account for approximately 30% of India’s exports.

How it will impact India?

• Reduction in exports – Exporters in the textiles, chemicals and gems and jewellery segments will face reduction of 50 to 70% in their exports to the US.
• All the tariffed goods from India will be extremely expensive in US.
• Decreases consumers for Indian goods – With India’s competitors such as Vietnam, Indonesia, Malaysia and Philippines facing reciprocal tariffs of less than 20%, Indian goods are going to find fewer takers in the US market.

• Makes exports expensive – The 50% tariff can reduce overall Indian exports to the US by 40 to 50 %.
• Sectoral impacts – The following sectors are going to face severe impacts

• Downfall of stock market - The stocks like Gokaldas textiles, Kitex, Camlin, Aarti industries, Atul, Bharat forge, Suprajit Engineering, Sona BLW etc will see a sharp reduction in revenue and profitability.
• Reduction in external demand – There will be weakening of external demand for the companies due to the ongoing chaos, which can diminish the outlook for all companies.
• Diminishes GDP – Exports to the US accounting for approximately 2.2 % of our GDP in 2025, per commerce ministry data.
• A 50% reduction in the US exports can lead to a decline of at least 30 to 40 basis points in our GDP for FY26.

What lies ahead?

• India could look for ways to help the affected exporters through subsidies or other schemes.
• Reduction of crude oil imports from Russia could be an option too, given that $87 billion of exports is at stake.

Reference

Business Line| US Tariff and its Effect on India