With 25% tariff, US turns up heat on Indian trade

India’s exports face a major setback after the US imposed a 25% tariff and an unspecified penalty on Indian goods, citing high tariffs and non-tariff barriers. The move comes after the failure to conclude a bilateral trade agreement by the August 1 deadline. Key export sectors like pharmaceuticals, marine products, leather, and automobiles could face major setbacks. 

India, which has a large agricultural base and strong trade surplus with the US, is unwilling to open sensitive sectors including agriculture and dairy, to subsidized American imports. However, the absence of a deal also gives India- policy flexibility, including the option to reimpose digital taxes on US tech firms.

India’s export prospects have taken a serious hit with the United States—its largest trading partner—imposing a 25% additional tariff on Indian goods starting Friday (01 August), along with an unspecified penalty. This move comes at a particularly vulnerable time for India, which is already facing economic headwinds and sluggish export growth.

The announcement was made by US President Donald Trump through a post on Truth Social.

While saying that Delhi was a “friend,” President Trump justified the imposition of tariffs by criticizing India’s high tariff rates and stringent non-monetary trade barriers, which he described as “strenuous and obnoxious.” Here it must be noted that, while India’s average tariff rate is around 17%—higher than the US average—it remains well within the commitments India made under the WTO. In contrast, the newly imposed US tariffs breach its own WTO obligations. The US, world’s largest economy, had recorded a trade deficit of US$ 45.8 billion with India, last year. The White House had earlier cautioned India over its high average applied tariffs—about 39% on agricultural goods, 45% on vegetable oils and about 50% on apples and corn. 

The decision to impose an additional 25% tariff and an unspecified penalty over and above that comes after India and the US failed to finalize an interim trade agreement by the August 1 deadline set for concluding trade talks with Washington. These measures are part of a broader strategy under which the Trump administration, since April 2, had initiated reciprocal tariffs against many trading partners but had temporarily paused implementation to allow space for bilateral deals. In April, Trump had announced tariffs of up to 27% on Indian goods.

The failure to reach a deal reportedly stemmed from India’s resistance to fully meeting US demands, particularly regarding zero-duty access to most tariff lines. While India had reduced certain tariffs in recent years, it reportedly hardened its stance during recent negotiations to protect vulnerable sectors like agriculture and dairy. Given that over 700 million Indians rely on agriculture—far exceeding the numbers in China, the EU, Japan, or South Korea—India cannot risk exposing its farming sector to heavily subsidized US imports that could threaten rural livelihoods. Last week, Commerce Minister Piyush Goyal stated in an interview that agriculture remains a sensitive area for India and that the government is committed to safeguarding the interests of its farmers.

This development, according to analysts, marks a significant deterioration in India-US trade ties. Trump’s remarks also reflected geopolitical discontent with India, criticizing its continuing military and energy relations with Russia—particularly at a time when global efforts are underway to pressure Russia over its invasion of Ukraine. India remains Russia’s largest buyer of energy and a major purchaser of its defense equipment. In July, Trump had announced that the U.S. would impose an additional 10% tariff on imports from countries aligning with the “anti-American policies” of the BRICS group.

The imposition of these tariffs is being seen as part of Washington’s effort to create urgency around concluding a Bilateral Trade Agreement (BTA) with India. Previously, both Prime Minister Narendra Modi and President Trump had aimed to finalize the first tranche of the deal by fall 2025. However, with the current statemate, the future of this deal is now uncertain. Notably, India has already reduced tariffs on a range of goods including Bourbon whiskey and motorcycles.

India has not yet officially responded to the move. In response to the Trump’s Truth Social post, the Indian government stated that it is reviewing the implications of the announcement and remains committed to achieving a fair trade agreement. However, trade analysts believe that a reversal or moderation of Trump’s position is still possible, as seen earlier with the EU and China.

Implications of the 25% tariff and an unspecified penalty

The impact of the 25% tariff, along with the unspecified penalty, is yet to be fully evaluated. However, initial analysis suggests that India could be worse off than many of its key export competitors, who have already struck favourable trade deals with the US. For instance, under recent agreements, the US has agreed to cut tariffs to 15% for the European Union and Japan, 20% for Vietnam, 10% for the UK, and 19% for Indonesia. Meanwhile, Bangladesh and Cambodia, which have not finalized deals with the US, face reciprocal tariffs of 35% and 36%, respectively. Although, India’s 25% tariff rate is on the higher side, but not substantially greater than what other nations are currently paying. In return, those countries have committed to eliminating most tariffs, often entirely, including on sensitive sectors like agriculture.

Sectors such as textiles and garments, where India holds a comparative advantage over some South Asian nations, might still remain competitive despite the new levies. However, other sectors like marine products, pharmaceuticals, leather, and automobiles—which have witnessed robust bilateral trade with the US—could see a significant negative impact.

In FY25, India enjoyed a substantial trade surplus with the US, earning US$ 41.4 billion in net foreign exchange from merchandise trade, with goods exports to the US growing by nearly 12% even as overall exports stagnated. Additionally, India exported services worth US$ 48 billion to the US during the year (FY25). The imposition of new tariffs threatens to erode this export momentum, especially if the unspecified penalty adds significantly to the cost.

An expert pointed out that the new tariffs, while damaging, could provide India with a certain degree of policy freedom. Without a binding deal in place, India is not compelled to make “onerous concessions” just to receive slightly lower tariffs. This leaves India with room to impose its own tariffs on US goods or reinstate regulatory measures such as the “Google tax” (equalisation levy), which had been withdrawn in anticipation of a global agreement on taxing the digital economy. That deal has since collapsed, following Trump’s withdrawal from the multilateral negotiation process.

While the tariff and penalty may be absorbed temporarily by Indian exporters and US buyers—especially in sectors where demand remains strong—the added uncertainty is likely to weigh heavily on exporter planning. Analysts caution that penalties as high as 10% or more could significantly distort pricing strategies, affecting long-term competitiveness.

The adverse trade move also complicates India’s geopolitical balancing act. Despite pressure from the West, India continues to maintain defence and energy ties with Russia—an issue that Trump has highlighted. India’s need to diversify its defence purchases and energy sources could further intensify if these trade frictions escalate.

Economic analysts have revised growth projections downward in light of the new tariffs. When the US first announced tariffs earlier in the year, growth projections for India’s FY26 GDP were reduced to 6.2% due to anticipated slowdowns in exports and delays in private investment. With the actual tariff and penalty now proving harsher than earlier forecasts, the impact on GDP could be even more significant. The ultimate degree of economic slowdown will depend on the size and duration of the penalties imposed.

In conclusion, the imposition of the 25% tariff and an unspecified penalty by the US signals a major setback in India-US trade relations and adds another layer of complexity to India’s economic outlook. Although continued BTA negotiations offer some hope for a breakthrough, the current situation brings considerable uncertainty for India’s exporters and the broader economic outlook. India, world’s most populous democracy, may now have to navigate this challenging environment with patience, strategic diplomacy, and strengthened domestic resilience to cushion the blow from what could be a prolonged trade standoff.