Navigating U.S. tariffs: India’s path to growth

Despite challenges from U.S. tariffs under President Donald Trump, India has the potential to strengthen its domestic industries. While higher duties on steel and aluminum exports have led to declining competitiveness and financial losses, the situation also presents an opportunity for India to reduce dependence on imports.

A report by Motilal Oswal highlights that India has the potential to strengthen its domestic industries despite the challenges posed by U.S. President Donald Trump’s tariff policies. These tariffs have led to rising costs, fluctuations in exchange rates, and a decline in export opportunities for Indian businesses. However, they also present India with an opportunity to enhance self-reliance and bolster local production, positioning the country for long-term economic resilience.

Over the past few years, the U.S. has imposed significant tariffs on Indian exports, particularly in key industrial sectors. In 2018, the U.S. levied a 25% tariff on US$ 761 million worth of steel and a 10% tariff on US$ 382 million worth of aluminum imported from India. These increased duties significantly raised the cost of Indian goods in the U.S. market, making them less competitive compared to alternative suppliers. As a result, Indian steel exports to the U.S. declined by 46% within a year, with American buyers shifting to cheaper sources. The ripple effect of these tariffs led to financial losses for Indian manufacturers and exporters, further exacerbating the strain on India’s trade balance.

Beyond the direct impact on trade, the report highlights the broader economic consequences of these tariffs, particularly their influence on India’s currency. India is heavily dependent on crude oil imports, sourcing nearly 87% of its oil from international markets and making payments in U.S. dollars. Any depreciation of the rupee, triggered by capital outflows due to global trade uncertainties, would raise the cost of these imports, adding inflationary pressure on the economy. A prolonged tariff war, the report warns, could lead to a contraction in India’s GDP by 0.3%, underscoring the broader macroeconomic risks associated with escalating trade tensions.

Despite these challenges, the report suggests that India can strategically use the situation to its advantage by focusing on strengthening its domestic industries. Historically, India has maintained higher tariff rates compared to many other major economies, a policy that can now be leveraged to reduce dependence on foreign goods. By strategically imposing import duties on select products and fostering local manufacturing, India can encourage domestic production and enhance its industrial base. Additionally, the current trade environment presents an opportunity to promote sectors that are less affected by U.S. tariffs, ensuring that India remains competitive in global markets.

Trump’s trade policies aim to balance protectionism with U.S. competitiveness, creating both challenges and opportunities for trade partners like India. While these policies introduce uncertainty, India can turn them into an advantage by focusing on domestic manufacturing, attracting local and foreign investments, and strengthening its trade agreements with other nations. By doing so, India can not only mitigate the risks posed by U.S. tariffs but also create a more self-sufficient and resilient economy in the long run.