India’s robust trade relationship with the United States is under severe strain amid escalating diplomatic tensions, with former U.S. President and Republican frontrunner Donald Trump threatening a punitive 25% tariff on Indian goods — and an additional 10% penalty for continued Russian oil imports, according to a Reuters report citing four Indian government sources.
The internal assessment by the Indian Ministry of Commerce and Industry, following Trump’s provocative remarks and policy signals, estimates that nearly $64 billion worth of Indian exports to the U.S. could be hit, potentially denting India’s competitive edge and undermining export-led growth in key sectors.
A Rapidly Escalating Diplomatic and Trade Row
The tensions reached a new high when Trump, speaking at a campaign rally on Tuesday, labelled both India and Russia as “dead economies”, criticising India’s trade practices, protectionist barriers, and its continued dependence on Russian crude oil and defence equipment. He warned that tariffs on Indian exports could rise “substantially in the next 24 hours,” unless New Delhi rethinks its energy and trade policies.
Last week, Trump had linked India’s energy ties with Moscow to broader U.S. concerns about the Ukraine war, indicating that countries maintaining strong trade ties with Russia may face financial and economic penalties.
The White House has not confirmed any official action yet, but senior members of the Republican Party have hinted at using tariffs as leverage against India if it does not scale down Russian oil purchases — a move that contradicts earlier Biden administration policies, which focused more on diplomacy and multilateral coordination.
Trade at Risk: $64 Billion in Exports
India exported goods worth approximately $81 billion to the United States in 2024, making the U.S. its largest single export market. The top exports include:
- Garments and textiles
- Pharmaceuticals
- Gems and jewellery
- Petrochemicals
- Machinery and IT hardware
The proposed 35% tariff (25% standard + 10% penalty) would make Indian products significantly costlier, opening the door for price competition from countries like Vietnam, Bangladesh, and Mexico, which may not be subject to such high duties.
Two Indian officials familiar with the assessment said this could cause “erosion of price competitiveness” and market share losses, especially in garments, generic drugs, and jewellery — areas where India currently enjoys strong U.S. demand.
Macroeconomic Impact: Limited but Notable
While the direct GDP impact is estimated to be moderate, around 40 basis points (0.4%), due to the relatively low share of exports in India’s $4 trillion economy, policymakers are concerned about the long-term structural implications.
With goods exports to the U.S. making up nearly 2% of India’s GDP, the effects on employment, industrial output, and forex inflows could be significant if the tariffs are sustained.
RBI Response and Economic Outlook
Despite the growing uncertainty, the Reserve Bank of India (RBI) on Wednesday maintained the GDP growth forecast for 2025 at 6.5% and kept key interest rates unchanged.
RBI Governor Sanjay Malhotra also addressed the diplomatic rift, responding to Trump’s “dead economy” jibe with a firm rebuttal: India contributes more to global growth than the U.S.
We are contributing about 18%, whereas the U.S. is around 11%. We have a very robust growth rate,” Malhotra stated, citing International Monetary Fund (IMF) data that projects India’s growth at 6.4% in 2025, compared to 1.9% for the U.S.
The RBI’s confidence is based on strong domestic demand, a resilient services sector, and growing investment flows, though officials acknowledged that global headwinds from trade disputes and geopolitical shifts pose downside risks.
The Russian Oil Factor
A central issue in this dispute is India’s purchase of discounted Russian crude oil, which has sharply increased since 2022, following Western sanctions on Moscow after the Ukraine invasion.
While India defends its purchases as necessary for energy security and inflation control, U.S. hawks have grown increasingly critical, arguing that Indian money is indirectly helping fund the Russian war effort.
Trump said on Wednesday that his administration would finalise the penalty structure only after assessing the outcome of ongoing diplomatic efforts to de-escalate the Ukraine conflict. However, he reiterated his tough stance on nations “aiding Russia economically.”
What’s Next?
- India is expected to engage in back-channel diplomatic talks with Washington to avert a trade war.
- Indian industry groups are lobbying for tariff exemptions, especially in pharmaceuticals and tech products.
- The government may consider policy tweaks or alternative oil sourcing strategies if the situation escalates.
- India is also likely to step up economic engagement with the EU, UAE, and ASEAN to diversify trade exposure.
With the U.S. elections just months away and global geopolitics increasingly uncertain, Indian businesses and policymakers are preparing for a period of heightened volatility.
As the world watches another possible chapter of Trump-style protectionism, India faces a crucial challenge: balancing strategic autonomy, energy security, and economic growth with its largest trade partner’s demands.
Whether diplomacy prevails or tariffs go into effect, the fallout from this dispute could reshape not only India-U.S. economic ties but also the broader global trading order.
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