Indian manufacturing, already in a vulnerable position, is likely to be severely affected by US President Donald Trump’s reciprocal tariffs. Despite the government’s efforts to boost the sector through the ‘Make in India’ initiative, the share of manufacturing in India’s GDP was slightly lower at 15.83 percent in 2023-24, compared to 15.99 percent in 2014-15.
Reciprocal tariffs refer to levies on imports from any nation that charges duties on US exports. “An eye for an eye, a tariff for a tariff—the same exact amount,” Trump promised during his campaign. What remains unclear is how these tariffs would be calculated.
With the US being India’s largest export partner, Trump’s reciprocal tariffs will likely have far-reaching consequences. The US administration’s plans to impose tariffs on steel, aluminium, pharmaceuticals, textiles and certain electronics will significantly challenge Indian exports to America. These tariffs will not only increase costs for Indian exporters but also shrink market share, intensify competition from imports, and potentially lead to job losses and investment slowdowns.
The immediate consequence will be the increased cost of Indian exports to the US. Consider the case of the 25 percent tariff on all US imports of steel and aluminium announced by Trump on February 10. With the current rates ruling at 2.95 percent for steel imports and 3.91 percent for aluminium, the higher tariffs will place a burden on Indian exporters, making their products less competitive in the US market. This would lead to reduced sales and revenue losses for companies engaged in these industries, eventually forcing layoffs and production cuts. This would only be a first-order effect. The downstream impact on industries such as automobile manufacturing and canned goods would also likely be substantial.
Similarly, India’s pharmaceutical sector, a leading supplier of generic drugs to the US, will see its profit margins squeezed due to increased costs. The same applies to textiles and electronics, where higher tariffs could prompt buyers to shift to buying from other low-cost manufacturing hubs such as Vietnam and Bangladesh.
The impact of such tariffs will not be limited to an immediate reduction in merchandise exports. A sustained decline in exports, combined with higher tariffs on multiple products, would dampen investments. This would place additional strain on India’s efforts to boost industrial growth.
Any attempt to mitigate the negative effects of reciprocal tariffs by reducing India’s own tariffs on US imports could have a detrimental effect on domestic manufacturing. Lower tariffs on US goods would make imported products more affordable, potentially shifting consumer demand away from locally manufactured goods. Industries such as consumer electronics, automobiles and machinery could struggle to compete with an influx of cheaper imports. Given that manufacturing plays a crucial role in employment generation, this shift could have far-reaching socio-economic consequences.
To navigate these challenges, India must rethink its economic strategy and take proactive measures to cushion the impact of Trump’s tariffs. One key step would be to diversify its export destinations. While the US has traditionally been one of India’s largest trading partners, the unpredictability of American trade policy underscores the need to explore alternative markets. Strengthening trade ties with the European Union could help offset losses in the US market, while expanding agreements with ASEAN nations could open up new opportunities. Additionally, emerging economies in Africa and Latin America present untapped potential for increased trade and investment.
India must also focus on strengthening domestic manufacturing to ensure resilience in the face of shifting geopolitical trade dynamics. Investment in innovation and technology will be critical to maintaining global competitiveness. Indian firms must adopt advanced manufacturing techniques and prioritise research and development to produce high-value, innovative products.
Policy measures to boost domestic demand, such as the recent increase in tax exemptions for income and interest proposed in the Union Budget 2025-26, could help counteract the negative impact of tariffs—provided the additional disposable income is not diverted toward imported goods. Ensuring the availability of affordable credit for businesses and consumers will also support investment and spending, strengthening the overall economy.
Trump’s tariffs come at a time when India’s manufacturing sector is already grappling with declining sales, rising inventories, and stagnating order books. However, this crisis also presents an opportunity for India to rethink its economic policies and adapt to a shifting global trade environment.
While Trump’s tariffs pose short-term challenges, India has the potential to emerge stronger by strategically repositioning its economy for the future. By implementing forward-thinking policies, India can mitigate the adverse effects of these trade measures and create a more self-sufficient, competitive industrial sector in the long run.
(Views are personal)
(tulsi.jayakumar@spjimr.org)
Tulsi Jayakumar | Professor, finance & economics; Executive Director, Centre for Family Business and Entrepreneurship at Bhavan’s SPJIMR