US Tariffs on India Come into Effect at 50%

SadaNews - As of Wednesday, the United States has imposed crushing tariffs of 50% on certain Indian goods, the highest in Asia, as President Donald Trump moves forward with these tariffs to punish New Delhi for purchasing Russian oil.

The new tariffs double the existing rate of 25% on Indian exports that took effect on August 7, delivering an additional blow to relations between the two countries. After years of bolstering economic and security ties, India and the United States now find themselves on opposite sides in Trump's trade war.

The White House clarified the new tariffs, which took effect at 12:01 a.m. in Washington, or 9:31 a.m. in New Delhi, in two notifications issued on Monday and Tuesday, indicating that India's chance of receiving an exemption seems unlikely amid Trump's stalled efforts to mediate peace between Russia and Ukraine.

Strategic Shock for New Delhi

This record rate puts India, the fastest-growing major economy in the world, in front of a potential decline in trade with its largest export market. The tariffs also threaten the competitiveness of India's exports against competitors like China and Vietnam and raise questions about Prime Minister Narendra Modi's ambitions to transform the country into a global manufacturing hub.

Ajay Srivastava, founder of the New Delhi-based "Global Trade Initiative," stated, "This is a strategic shock that threatens India's long-standing foothold in labor-intensive U.S. markets, risks exacerbating unemployment in export hubs, and may weaken India's participation in global value chains."

He added that competitors may benefit, "potentially leading to India's exclusion from key markets even after the tariffs are lifted."

Disputes Over Russian Oil

The tariffs have shocked Indian officials and come after months of trade discussions between New Delhi and Washington.

India was one of the first countries to start trade negotiations with the Trump administration, but high tariffs and protectionist policies in sectors such as agriculture and dairy have frustrated U.S. negotiators.

Relations further deteriorated after Trump criticized India over its purchases of Russian oil, saying it is funding Vladimir Putin's war in Ukraine, while New Delhi argued that these purchases contribute to stabilizing energy markets and confirmed that it will continue buying Russian oil "based on financial benefit."

The strained relationship has led India to pivot away from the United States and strengthen its ties with members of the BRICS bloc. In recent months, Beijing and New Delhi have sought to repair relations that deteriorated following deadly border clashes in 2020, and Modi is expected to meet President Xi Jinping on the sidelines of a security summit in China next week, marking his first visit to the country in seven years.

At the same time, India and Russia have pledged to increase their annual trade by 50% to reach $100 billion over the next five years.

New Delhi has taken a defiant stance, confirming it will continue purchasing Russian oil as long as it is financially viable. India has increased its oil imports from Russia since the full-scale war on Ukraine began in 2022, now accounting for nearly 37% of Russia's oil exports, according to Moscow-based "Kassatkin Consulting."

Indian companies had temporarily halted imports of Russian "Ural" crude in early August, but returned to the market in subsequent weeks.

Domestic Economic Implications

An American trade delegation scheduled to arrive in India between August 25-29 for the sixth round of negotiations has postponed its visit, increasing concerns about the ability of both sides to reach a trade agreement by the fall, a goal set during Modi's visit to the White House in February.

CitiGroup estimated that the 50% tariffs pose a negative risk ranging from 0.6 to 0.8 percentage points on annual GDP growth.

The American tariffs will not affect some key industries. For example, electronics exports will not be included, thus currently exempting Apple's massive new investments in factories in India. Additionally, pharmaceutical exports will not be impacted.

The economic impact may be mitigated by the fact that India's economy is largely driven by domestic demand rather than exports, making it essential to bolster consumer and business confidence for faster growth.

Private consumption accounts for about 60% of India's GDP, and while the United States is India's largest export market, with exports of $87.4 billion in 2024, this only represents 2% of India's overall GDP.

To boost confidence, Modi's government has pledged "next-generation reforms," starting with a comprehensive overhaul of the consumption tax. Officials in New Delhi are also meeting to devise measures to support sectors like textiles and footwear that are likely to be severely impacted by the high tariffs.

Pressure on Financial Markets

Indian bond and currency markets fell ahead of the implementation of the new tariffs, making the rupee the worst-performing currency in Asia this year. Indian stock markets have already witnessed outflows from foreign investors nearing $5 billion since July.

Trinh Nguyen, chief economist at Natixis, wrote in a note on Tuesday: "The bright spot may be that this external pressure will push India to accelerate overdue reforms." She added, "Land, labor, and liberalization are all necessary to unleash growth and enhance competitiveness."