Trump’s Spicy Tariffs : India About To Face a “loo roll shortage”

Donald Trump’s tariffs may negatively impact India’s economic growth and export potential, according to experts. The U.S. President’s decision to impose a 25% tariff on imports from India, coupled with an undisclosed additional penalty, raises uncertainties about the extent of this impact.

In a post on his Truth Social platform, Trump announced that the penalty would take effect on August 1, targeting India for purchasing Russian oil and weapons “at a time when everyone wants Russia to STOP THE KILLING IN UKRAINE.” Understanding the details of this penalty will be crucial for assessing the economic ramifications of his decision.

Aditi Nayar, chief economist at Icra, noted that the proposed tariff and penalties exceed expectations, likely creating obstacles for India’s GDP growth. Icra recently lowered its GDP forecast for India for the current financial year from 6.5% to 6.2% due to the anticipated negative effects of the tariff hikes. Similarly, Nomura predicted that India’s GDP could decline by 0.2% as a direct result of the tariffs, labeling them as “growth negative.”

The Indian stock market reacted negatively to the announcement, opening lower at the start of trading. Fund manager Nilesh Shah remarked that the market had anticipated a favorable tariff resolution, considering the aligned long-term strategic interests of the U.S. and India.

Despite ongoing trade negotiations between the two nations, which included India reducing tariffs on specific goods like Bourbon whiskey and motorcycles, Trump’s tariffs create challenges. The U.S. currently faces a $45 billion trade deficit with India, which Trump aims to reduce.

According to Rahul Ahluwalia from the Foundation for Economic Development, the combination of a 25% tariff and additional penalties puts India at a competitive disadvantage compared to other Asian countries like Vietnam and China. Recent negotiations resulted in significant reductions of tariffs on Chinese imports, while India’s tariffs are now less favorable in comparison.

The potential sustained tariffs could adversely affect key sectors such as marine products, pharmaceuticals, textiles, leather, and automobiles, which have historically seen strong bilateral trade, warned trade policy expert Agneshwar Sen from EY India.

Reactions from economists, exporters, and industry leaders in India have been overwhelmingly negative. Harsha Vardhan Agarwal, president of the industry body FICCI, expressed hope that the increased tariffs would be a temporary measure, paving the way for a permanent trade agreement. Dr. Ajay Sahai, who leads a federation of Indian exporting organizations, stated that the tariffs would necessitate new price negotiations between U.S. buyers and Indian exporters to determine how much of the tariff increase can be absorbed.

Tariffs, being taxes on imported goods, indirectly affect exporters by raising costs for consumers, which can diminish demand. This often forces exporters to lower prices to remain competitive, impacting their profit margins.

India’s commerce ministry is currently assessing the implications of Trump’s announcement. The Indian government remains committed to a mutually beneficial trade agreement while emphasizing the need to protect the interests of farmers, entrepreneurs, and micro, small, and medium enterprises (MSMEs). These priorities have complicated negotiations, particularly in agriculture and other politically sensitive areas.

The opposition Congress party criticized the government in light of Trump’s announcement, highlighting Prime Minister Narendra Modi’s past support for Trump and labeling the tariff imposition as a significant failure in foreign policy.

Mark Linscott from the U.S.-India Strategic Partnership Forum noted that linking the trade deal to India’s economic ties with Russia adds a new layer of complexity to negotiations. Since the beginning of the war in Ukraine, India has maintained its historic ties with Russia, emphasizing the need to secure oil at affordable prices for its citizens while gradually reducing dependence on Russian arms.

Despite these challenges, Linscott believes that both nations share substantial interests in resuming negotiations and reaching an interim agreement. The U.S. is India’s largest export market, with bilateral trade reaching $190 billion and a goal to increase it to $500 billion in the coming years.

While Trump has referred to India as a “good friend,” he has consistently criticized its high tariffs. In a recent post, he stated, “I don’t care what India does with Russia. They can take their dead economies down together, for all I care. We have done very little business with India; their tariffs are too high, among the highest in the world.”

Negotiations between India and the U.S. are anticipated to continue throughout August, with a U.S. delegation expected to visit India to discuss a comprehensive trade agreement. Many hope that the tariffs will be negotiated downward and that the 25% reciprocal tariff will be temporary until a detailed trade deal is finalized. The two sides have set a fall deadline for concluding the agreement, though even the best-case scenario may result in tariffs remaining in the 15-20% range, which Nomura finds disappointing given India’s advanced negotiation stage.

While the impact of the tariffs may be somewhat mitigated by India’s more domestically oriented economy, Nomura believes that Trump’s decision could lead to increased likelihood of monetary policy easing, potentially prompting India’s central bank to implement deeper interest rate cuts to support growth.