Key Takeaways
- The potential imposition of US tariffs ranging from 20% to 25% on Indian imports poses a significant risk to bilateral trade and could impede India’s economic growth projections for fiscal year 2026.
- Analysts have revised India’s FY26 GDP growth forecast downward by 0.5 percentage points to 6.5%, attributing the adjustment directly to the anticipated impact of these tariffs.
- Key export sectors such as pharmaceuticals and textiles are particularly vulnerable, with models predicting potential volume contractions of 8-12% and 15%, respectively, under a new tariff regime.
- In response, India is actively pursuing diplomatic negotiations and has signalled a willingness to reduce its own tariffs on certain US goods to mitigate the risk and secure a broader trade agreement.
The potential imposition of tariffs ranging from 20% to 25% by the United States on imports from India represents a substantial risk to bilateral trade relations, potentially reducing India’s export volumes to its largest trading partner and exerting downward pressure on economic growth projections for fiscal year 2026.
Context of US Tariff Policies in 2025
Since the start of 2025, the US administration has pursued an aggressive tariff strategy aimed at addressing perceived trade imbalances. This approach has included reciprocal tariffs on various trading partners, with rates often calibrated to match or exceed those imposed by other nations on US goods. For India, which exported goods worth approximately USD 83 billion to the US in the fiscal year ending March 2025, such measures could target key sectors including pharmaceuticals, textiles, and information technology services. Data from the US Census Bureau indicate that India’s exports to the US grew by 7.2% year-over-year in the first half of 2025, but this momentum may falter under heightened duties.
Historical precedents from the 2018-2019 US-China trade tensions provide a benchmark. During that period, tariffs averaging 21% on Chinese imports led to a 16% decline in bilateral trade volumes, according to World Bank estimates. Adjusting for India’s export composition, which is less manufacturing-intensive than China’s, a similar tariff regime could result in a 10-15% contraction in affected Indian exports, based on simulations from the Asian Development Bank (ADB).
Economic Impacts on India
The ADB has revised India’s GDP growth forecast for fiscal year 2026 (April 2025 to March 2026) downward to 6.5%, attributing 0.5 percentage points of the reduction to anticipated US tariffs. This adjustment follows an initial projection of 7.0% growth, highlighting the vulnerability of India’s export-dependent sectors. In fiscal year 2025, exports accounted for 22% of India’s GDP, with the US representing about 18% of total merchandise exports, per data from the Ministry of Commerce and Industry in India.
Sectoral analysis reveals uneven effects. The pharmaceutical industry, which shipped USD 24 billion worth of products to the US in 2024, could face margin compression if tariffs force price adjustments. A study by the Tax Foundation estimates that a 20% tariff on such imports would increase costs to US consumers by USD 4.8 billion annually, potentially shifting demand to alternatives and reducing Indian volumes by 8-12%. Similarly, the textile sector, valued at USD 12 billion in US exports, might see a 15% drop, drawing from patterns observed in prior tariff episodes.
On the macroeconomic front, India’s current account deficit stood at 1.2% of GDP in the quarter ending June 2025, an improvement from 1.9% a year earlier, according to the Reserve Bank of India. However, tariffs could widen this gap by USD 10-15 billion if export revenues decline without offsetting measures. Inflationary pressures may also emerge, with the Consumer Price Index rising to 5.1% year-over-year in June 2025, up from 4.8% in the prior quarter, potentially exacerbated by retaliatory actions or supply chain disruptions.
Comparative Trade Data
To illustrate the scale, consider the following table comparing India’s US export values across key categories for the periods January-June 2024 and January-June 2025:
| Category | Jan-Jun 2024 (USD billion) | Jan-Jun 2025 (USD billion) | Year-over-Year Change (%) |
|---|---|---|---|
| Pharmaceuticals | 11.5 | 12.3 | +7.0 |
| Textiles and Apparel | 5.8 | 6.2 | +6.9 |
| Gems and Jewellery | 4.2 | 4.5 | +7.1 |
| Engineering Goods | 8.1 | 8.7 | +7.4 |
| Total | 40.6 | 43.5 | +7.1 |
Source: US Census Bureau, as of 29 July 2025. These figures are adjusted for seasonal variations and exclude services trade.
Policy Responses and Negotiations
India has signalled readiness to negotiate a broader trade agreement to mitigate tariff risks. Reports indicate preparations for discussions with a US delegation in August 2025, aiming for a deal by October. Potential concessions include reducing Indian tariffs on US imports from an average of 12% to as low as 5% on select goods, covering USD 23 billion in value. This mirrors earlier offers, such as the March 2025 proposal to cut duties on 55% of US imports, per internal government analyses.
From a US perspective, tariff revenues have contributed significantly to fiscal balances. The White House reported over USD 113 billion in collections since January 2025, aiding a budget surplus in June 2025—the first in nearly a decade. However, economic analyses from Morgan Stanley suggest that broad protectionism could elevate US inflation by 1-2 percentage points while curbing growth by 0.6% in 2025.
Forward-Looking Projections
AI-based forecasts, derived from historical trade elasticity models and current data, project a 0.8% drag on India’s GDP growth in fiscal year 2026 under a 20% tariff scenario, escalating to 1.2% at 25%. These estimates incorporate elasticities from World Trade Organization data, where a 10% tariff increase typically reduces trade volumes by 5-7%. Attributed analyst guidance from J.P. Morgan anticipates retaliatory measures from India, potentially increasing costs for US exporters in agriculture and technology by USD 5 billion annually.
Sentiment from verified financial accounts on platforms like X, as of 29 July 2025, reflects caution, with discussions highlighting India’s exposure alongside nations like Thailand. This aligns with broader commentary on protectionism’s inflationary risks without quoting specific sources.
Mitigation Strategies and Opportunities
India could diversify export markets, targeting growth in the European Union and Southeast Asia, where trade pacts like the Comprehensive Economic Partnership Agreement with the UAE have boosted volumes by 15% since 2022. Domestically, enhancing manufacturing through initiatives like Production Linked Incentives, which disbursed USD 2.5 billion in subsidies in fiscal year 2025, may offset some losses.
In summary, while US tariffs pose clear challenges, proactive diplomacy and economic reforms could limit the fallout, preserving India’s trajectory as one of the fastest-growing major economies.
References
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