India Must Turn Trump’s Tariff Blow into a Push for Manufacturing Reform

Donald Trump’s return to tariff brinkmanship has put India’s exporters on notice. Days before the August 1 deadline, the United States imposed a 25% tariff on Indian goods and signalled an additional penalty that could rise to 100% for countries still trading oil with Russia. For all the talk of “friend” India, the gesture underscores a reality: Washington’s strategic concessions are shaped more by self-interest than sentiment.

This is not the first time India has been at the receiving end of Trump’s tough trade stance. In his previous tenure, India lost duty-free access under the Generalized System of Preferences, which had allowed over 3,500 products from low-income countries to enter the US at zero tariff. That removal, like today’s hike, tested the resilience of India’s exporters and revealed that the bigger challenge often lies at home.

India’s trade exposure to the US is significant. America remains its largest export destination, accounting for 18% of outbound shipments valued at $77 billion in 2023 and $78 billion in 2024. The composition of this basket matters: diamonds contribute nearly a fifth, packaged medicaments another 14%, refined petroleum 8.9%, textiles and apparel 3.7%, and automotive components about 2%. 

The GSP-linked segments, including textiles, certain chemicals, and automotive parts, form a relatively modest slice of this mix. That helps explain why the impact of previous tariff shocks, while headline-grabbing, proved less severe than feared.

Tariff Squeeze
Yet India cannot ignore the cumulative strain. Tariffs raise costs in a market where rivals such as Vietnam, Bangladesh, and Indonesia also face similar penalties, narrowing competitive margins but not eliminating them. Trump’s broader trade play, easing restrictions on US chip-design exports to China while hardening barriers against India, highlights where Washington’s priorities lie. China’s heft secures concessions while India must fight harder for scraps.

Amid this squeeze, a new trade deal with the UK offers some cushion. The India–UK Free Trade Agreement eliminates tariffs on 99% of Indian exports to Britain, covering jewellery, pharmaceuticals, textiles, and automotive parts. These gains will take time to materialise but create a template for diversifying beyond the US market. India has also secured incremental access to Europe, Japan, and Southeast Asia, partly offsetting losses in America.
 
The bigger reset, though, lies within. Tariffs expose a deeper vulnerability: India’s manufacturing base remains shallow. Manufacturing’s value-added share of GDP has stagnated around 17% for years. Foreign direct investment, critical for technology transfer and scale, has weakened. Gross inflows slipped to 1% of GDP in the first half of 2023–24, the lowest since 2005–06, while net inflows fell to 0.6%. Structural frictions such as an inverted duty structure, rigid labour rules, and patchy logistics continue to erode competitiveness.

A CUTS International study mapping 1,464 tariff lines across textiles, electronics, chemicals, and metals illustrates the problem vividly. It finds that 136 textile items, 179 electronics components, 64 chemical products, and 191 metal goods face inverted duties where raw materials are taxed lower than finished products. The result is predictable: higher costs, thinner margins, and a bias against value addition. Even when headline GST rates appear moderate, ancillary costs such as marketing, warehousing, and courier services attract 18%, further denting export viability.

Recent budget tweaks have tried to address these anomalies. Tariffs on interactive flat panel displays were raised from 10% to 20%, while duties on open cells and components fell to 5% in an attempt to boost local assembly. This rationalisation must deepen and widen from electronics to textiles to chemicals if India is to compete at scale.

Reform Chance
Tariffs also complicate India’s energy and defence calculus. Trump’s surcharge targets countries trading oil with Russia, where India has emerged as a major buyer since 2022. Balancing cheaper Russian crude with access to US markets will be a delicate act. One lever lies in Washington’s own commercial priorities. India has already contracted nearly $20 billion of US-origin defence equipment since 2008. Expanding such purchases could soften trade tensions, although it would come at a fiscal cost.

None of this diminishes the urgency of building shock absorbers at home. With domestic consumption, investment, and government spending already accounting for 80% of GDP, the immediate fallout of tariffs is cushioned. The real prize is future-proofing exports by making them competitive on their own merit. That means easing logistics bottlenecks, deepening supply chains, and accelerating reforms in labour, land, and tax regimes.

Trump’s tariff gambit is a reminder that trade winds can shift overnight. For India, the way out is not pleading for exemptions but seizing the moment to rewire its manufacturing core. A more resilient export base, underpinned by smarter policy and diversified markets, would turn every future tariff shock into an opportunity rather than a crisis.