Announcement of the tariff
- On 30 July 2025, U.S. President Donald Trump wrote on his Truth Social account that India’s tariffs and non‑tariff barriers were “far too high” and “obnoxious.” He claimed that India buys large quantities of military equipment and energy from Russia and that these purchases, together with its trade barriers, justify reciprocal U.S. tariffs. Trump said that from 1 August 2025, India would “be paying a tariff of 25%, plus a penalty”. This announcement followed his earlier hints that the rate could be 20 – 25 %, and he described India as a “good friend” even while insisting that it levies higher tariffs on U.S. goods than almost any other country.
Potential impact on the Indian economy
| Aspect | Observations from analysts |
|---|---|
| Export sectors at risk | “Reciprocal” import tariffs could severely curtail Indian exports of chemicals, metals, automobiles/auto parts and pharmaceuticals, leading to job losses and reduced fiscal stability. Sectors expected to be hit hardest include jewellery, textiles and food products. |
| Scale of trade | India exported goods worth about US $74 billion to the United States in 2024, running a sizable trade surplus; estimates suggest that new tariffs could cost India up to US $7 billion annually. If the U.S. eliminates the tariff gap (India’s average tariffs on U.S. goods are around 9.5 %, while U.S. levies on Indian goods are roughly 3 %), India would lose cost advantages and its exports would become less competitive. |
| Pharmaceuticals | The U.S. is Indian drugmakers’ largest market—generic drug exports to the U.S. were about US $8.7 billion in fiscal 2024, accounting for roughly 31 % of the industry’s exports. Reuters notes that many large drug companies (Sun Pharma, Dr Reddy’s, Cipla, Biocon, Lupin and others) derive 30 % – 47 % of their revenue from the U.S. market. Tariffs of 25 % or more on pharmaceutical imports, which Trump also signalled, could raise costs and squeeze margins—some companies said they would have to pass on the tariffs to U.S. consumers. |
| Auto parts and vehicles | Under Section 232, imported vehicles and parts are already subject to a 25 % tariff, but changes announced in late April 2025 allow automakers to offset some of the duty for parts used in vehicles assembled in the U.S. and prevent “stacking” of multiple tariffs. However, the high‑tariff environment remains, and analysts note that a 25 % tariff on auto parts would still harm suppliers in countries like India; relief measures apply only to parts assembled into U.S.‑made vehicles. |
| Economic costs and distribution | Research cited by The Strategist points out that high tariffs could slow India’s GDP growth, because Indian exporters would have to either absorb the tariff or lose market share. India may be forced to reduce its own tariffs in sectors such as bourbons, wines and electric vehicles to appease the U.S., and the 2025‑26 budget already includes such concessions. |
Analysts’ reactions
- Mixed sectoral impact – Ajay Srivastava of the Global Trade Research Initiative told ANI (reported by the Free Press Journal) that the impact would vary by sector. He argued that generic pharmaceuticals may still remain competitive even with a 25 % duty because European alternatives are more expensive, and smartphone exports are unlikely to be hit significantly if Chinese competitors face even higher duties. However, the precise effect will depend on whether the U.S. imposes higher tariffs on other countries; if other nations face steeper duties, a 25 % levy on India could be relatively manageable.
- Pharmaceutical lobby’s concerns – Reuters noted that the U.S. pharmaceutical import tariffs would be “25 % or higher” and Indian pharma executives worry that margins will shrink; major companies derive a large share of revenue from the U.S. and may pass costs on to consumers.
- Calls for negotiation – Commentators such as Shashi Tharoor argue that India has little choice but to lower its own tariffs while negotiating improved access to U.S. markets. The prospect of reciprocal tariffs has already prompted India to offer tariff reductions on select U.S. goods (bourbon, wines, electric vehicles), but broader concessions—particularly in agriculture—are politically sensitive.
- Uncertainty and risk – Analysts stress the uncertainty around the exact scope of the U.S. tariffs. The impact will depend on whether the duties apply to broad product categories or specific goods. There is also concern that escalating tariffs might encourage U.S. import substitution, which could permanently erode Indian suppliers’ market share.
Possible Indian response
Given the significance of the U.S. market and the potential loss of up to US $7 billion in exports, India is expected to pursue several strategies:
- Intensify negotiations – Continue negotiating a bilateral trade agreement with the U.S. in an attempt to secure exemptions or lower tariffs.
- Targeted tariff reductions – Lower certain tariffs on U.S. goods (as already done for bourbon, wine, electric vehicles) to build goodwill and preserve market access.
- Market diversification – Seek alternative export markets, although shifting such large volumes may be difficult in the short term.
- Domestic reforms – Reduce high domestic tariffs and non‑tariff barriers to make reciprocal arrangements less onerous.
Summary
The 25 % tariff announced by President Trump is not yet in force, but it represents a substantial escalation in U.S.–India trade tensions. Analysts warn that reciprocal tariffs could significantly erode India’s export earnings, particularly in labour‑intensive sectors, pharmaceuticals and auto parts. Some experts suggest that the impact may be mitigated if other countries face higher tariffs or if offsets apply to U.S.‑assembled goods, but the overall outlook points to higher costs, reduced competitiveness and pressure on India to lower its own trade barriers.
Disclaimer:
This document utilizes AI-generated insights to explore publicly available data and news sources for the purpose of internal research and presentation. The final output is subject to thorough cross-verification and validation by our research team before any public or client-facing dissemination. We ensure the highest standards of accuracy and compliance before concluding or publishing any investment or strategic viewpoint.
Sources :-
https://www.hindustantimes.com/india-news/donald-trump-announces-25-tariff-on-india-101753877642176.html
https://www.aspistrategist.org.au/trumps-tariffs-challenge-indias-economic-balance/#:~:text=The%20economic%20impact%20on%20India%2C,up%20to%20%247%20billion%20annually
https://www.reuters.com/business/healthcare-pharmaceuticals/indian-drugmakers-with-big-us-exposure-trump-plans-pharmaceutical-import-tariffs-2025-02-19/#:~:text=Most%20Indian%20generic%20drugmakers%20count,Pharmexcil
https://www.spglobal.com/automotive-insights/en/rapid-impact-analysis/auto-tariffs-update-relief-complexity-automakers#:~:text=Auto%20tariffs%20will%20no%20longer,%E2%80%9Cstack%E2%80%9D%20on%20other%20tariffs
https://www.freepressjournal.in/business/us-tariff-threat-of-2025-on-indian-exports-may-have-mixed-sectoral-impact-says-trade-expert#:~:text=He%20added%2C%20,Speaking%20on%20the%20possible
