US–India Tariff War: Economic Tremors, Sectoral Fallout & Strategic Pathways

Brief Note About the Series

This analysis is part of a two-article series. The first installment examines the economic tremors, sectoral fallout, and strategic pathways arising from the ongoing tariff dispute. This piece, being the first installment covers the economic impact, strategic responses, and sector-specific consequences, GDP Fluctuations, Market Reactions and Sentiments. While the second installment will throw light on the alliances, power plays, and geopolitical dimensions, touching upon spaces like the Indo-Pacific Chessboard, Indo-Russia relations and China acting as a silent unspoken factor.

Introduction: From Partnership to Protectionism

In a matter of months, the US–India trade relationship has dramatically shifted from diplomatic collaboration to escalating trade friction. Sparked by Washington’s imposition of steep "reciprocal" tariffs, initially at 25% in April - August 2025 and then rising to a staggering 50% in early August, the dispute has targeted a vast swathe of India’s export portfolio. These punitive moves are primarily aimed at labor intensive goods, including textiles, gems, auto components, and seafood, sparking fears of widespread economic disruption.

For much of the last two decades, the United States has been India’s single largest export destination, a market that absorbs everything from precision-cut diamonds to complex engineering goods. In 2024, bilateral trade in goods crossed $125 billion, with Indian exports to the US valued between $79–87 billion. Trade tensions are not new: the US withdrew India’s Generalized System of Preferences (GSP) status in 2019, removing tariff-free access for billions of dollars’ worth of goods. In return, India levied higher duties on US agricultural products and certain manufactured goods. That standoff ended in 2022 with a limited trade understanding, but the 2025 tariffs effectively reopen the old wound, this time with a sharper edge and much higher stakes.

Macroeconomic Impact: Small in Numbers, Significant in Sentiment

While India’s economy is not heavily export-dependent (goods exports account for roughly 20% of GDP), the sudden tariff shock still carries macroeconomic weight. Moody’s Analytics has already trimmed India’s 2025 GDP growth forecast from 6.4% to 6.1%, estimating that prolonged tariffs could shave off an additional 0.3 percentage points in 2026.

• Export Exposure: Approximately $86–87 billion worth of Indian exports to the US fall within the tariff ambit, accounting for nearly 50–55% of bilateral trade. (Drishti IASLinkedIn)

  
  

• GDP Drag Estimates: Moody’s trimmed India’s 2025 forecast to ~6.1%, signaling a 30 bps reduction owing to tariff shock.  The Asian Development Bank downgraded FY25–26 growth to 6.5%, citing export and job risks. Overall, the impact on GDP is expected to be 0.2–0.5 percentage points, varying by model.(Business Standard, Drishti IAS, LinkedInBusiness StandardReuters)

  
  

• Soft Landing Perspective: The PHDCCI estimates a modest 1.87% hit to overall exports and a 0.19% drag on GDP, citing India’s diversified trade base. (India TodayOutlook Business)

  
  

The immediate impact is concentrated in export heavy manufacturing hubs such as Surat, Tirupur, and Pune, where factory orders for US-bound shipments have already slowed. For the broader economy, the concern is less about collapse and more about lost momentum: delayed manufacturing investments, weaker job creation in export sectors, and downward pressure on the rupee as trade receipts shrink. India’s domestic market strength with consumption accounting for nearly 60% of GDP will cushion the blow, but the tariffs still complicate the government’s ambitions to make exports a core driver of the $5 trillion economy goal.

Sectoral Fallout – Industry by Industry

Gems and Jewelry: The Crown Jewel Under Threat

India’s gem and jewelry sector, worth $10.17 billion in exports to the US in 2024, is one of the hardest hit. The 50% tariff all but wipes out the pricing advantage of Indian diamond cutting and gold jewelry manufacturing. Surat, the global hub for diamond polishing, faces the prospect of idle machinery and workforce reductions unless alternative markets in the Middle East and East Asia can be expanded quickly.

Electronics and Electrical Equipment: Momentum Interrupted

India’s electronics exports to the US, valued at nearly $9.9 billion, have been one of the fastest growing components of bilateral trade, driven by smartphone assembly, telecom hardware, and industrial electronics. The tariffs threaten to slow India’s ambitions to position itself as an alternative to China in global electronics supply chains. While domestic demand can absorb some of the production, the loss of US orders will affect scale economies and investment flows from global OEMs.

Textiles and Apparel: Labor at Risk

The textiles and apparel industry, employing over 45 million workers, exported $8.9 billion worth of goods to the US last year. Even a partial loss of this market could trigger widespread layoffs in clusters like Tirupur (knitwear) and Panipat (home textiles). Unlike electronics, textiles face high substitution risk, US buyers can easily shift orders to Bangladesh or Vietnam if Indian prices rise.

Auto Components: Supply Chains Under Strain

India’s auto component exports to the US, valued at around $3.5 billion, feed into North American manufacturing ecosystems. The tariffs add cost pressures that may prompt US automakers to diversify sourcing to Mexico or Eastern Europe. This sector’s integration into global just-in-time supply chains means even small delays or cost changes can lead to contract losses.

Pharmaceuticals: A Rare Exemption

Notably, pharmaceuticals worth $24 billion globally and a cornerstone of India’s export portfolio have been exempted from the new tariffs. This exemption reflects the US’s dependence on Indian generics for healthcare affordability. However, industry experts warn that exemptions can be temporary, and the precedent of targeted tariffs keeps long-term uncertainty alive.

Agriculture and Seafood: Margins Eroded

Indian agricultural and seafood exports, particularly basmati rice, spices, and frozen shrimp, face steep tariff induced price hikes in the US market. The Marine Products Export Development Authority estimates a potential loss of ₹24,000 crore (~$3 billion) in annual revenue if orders are diverted to lower-cost producers in Southeast Asia.

Financial Markets and Policy Response

The announcement of the tariffs sparked immediate market jitters. Sector specific indices for textiles, jewelry, and auto components fell between 2% and 4% in the days following the announcement. The rupee also saw temporary depreciation against the dollar, reflecting investor concern over trade earnings.

In response, the government has initiated a two-track strategy:

1. Defensive Measures: Filing a formal dispute at the WTO, exploring reciprocal duties, and engaging with affected industry associations.

2. Offensive Measures: Fast-tracking trade talks with the European Union, the UK, and Gulf Cooperation Council countries, aiming to diversify export markets and reduce US dependency.

   
   

The Reserve Bank of India has signaled willingness to provide targeted liquidity support to export oriented SMEs, while the Ministry of Commerce is considering expanded credit guarantees and marketing assistance.

The Long Game – Lessons and Opportunities

While the short term pain is undeniable, the tariff war also offers strategic lessons for India's economic planners. Overreliance on a single export market, even one as lucrative as the US, exposes industries to policy shocks beyond their control. The vulnerability becomes particularly acute when geopolitical considerations begin to influence trade policy decisions. This episode strengthens the case for a more resilient and diversified trade strategy that can withstand external pressures and political fluctuations in partner countries.

• Value Addition at Home: Moving up the value chain to make products less price-sensitive and develop unique competitive advantages that cannot be easily replicated by alternative suppliers. This includes investing in research and development, enhancing manufacturing capabilities, and focusing on specialized products where India has inherent strengths.

• Trade Diversification: Expanding in regions where India enjoys stable market access, such as Southeast Asia, Africa, and Latin America, while simultaneously deepening economic partnerships with established markets like Europe and Japan to create a balanced portfolio of export destinations.

• Domestic Demand Leverage: Using India's vast consumer base as a testing ground for globally competitive products, allowing manufacturers to achieve scale economies and refine offerings before pursuing export markets. This approach helps create resilience against external shocks while building globally competitive businesses.

  
  

If these lessons are acted upon decisively, the 2025 tariff crisis may be remembered less as a blow and more as a pivotal moment that catalyzed a fundamental restructuring of India's trade strategy, ultimately resulting in a more robust and diversified export ecosystem that is less vulnerable to the policy decisions of any single market.

Conclusion – Navigating the Headwinds

The US–India tariff war is a reminder that even robust trade relationships can be upended by political calculations and shifting alliances. For India, the challenge lies in absorbing the immediate sectoral shocks while accelerating a broader transformation of its export ecosystem. For businesses, the message is clear: agility, diversification, and innovation are no longer optional, they are the keys to surviving in an era where trade policies can change overnight. The most successful companies will likely be those that view this challenge not as a temporary setback but as an opportunity to rethink their global market strategy and strengthen their competitive position across multiple markets.

While diplomatic channels remain open for resolution, businesses cannot afford to wait for political solutions. Forward-thinking enterprises are already reconfiguring supply chains, exploring alternative markets, and investing in product differentiation to weather the storm. In the end, whether the tariffs leave lasting scars or catalyze a more resilient trade model will depend on how swiftly industry and policymakers turn disruption into adaptation.