Soon, US President Donald Trump’s 25% additional tariffs on India, for buying Russian oil, will come into effect, taking the total tariffs to 50%. The sweeping tariffs on Indian exports will target $60.2 billion worth of goods including labour-intensive sectors like textiles, jewellery, shrimp, carpets, and furniture. The shock is real. A potential 70% drop in export volumes could severely hit India’s trade-dependent industries. The Indian rupee continued its losing streak for a fifth consecutive session on Tuesday even as markets tumbled due to the tariff shock.
But while other major economies like Japan, the EU and South Korea have bowed to Trump’s pressure, India remains defiant. What gives India the confidence to hold its ground? India’s decision to not yield to Trump’s tariff bullying is not reckless bravado. It’s calculated resilience, underpinned by critical strengths: macroeconomic stability, a consumption-driven economy, strategic use of adversity for ushering in reforms, and diversified trade partnerships.
Macroeconomic stability is the bedrock
India’s greatest source of confidence lies in its macroeconomic fundamentals. Even as Trump raises trade barriers, India’s growth story remains intact. S&P Global Ratings recently upgraded India’s sovereign rating to ‘BBB’ with a stable outlook, a first in 18 years. The reasons behind this are telling: robust economic growth, fiscal discipline and conducive monetary policy that has kept inflation in check.
India’s economy is projected to remain the fastest-growing major economy in the world, with GDP growth rates well above global averages. The country’s manageable debt levels, strong forex reserves and contained current account deficit further insulate it from external shocks. In short, India’s house is in order, and that gives it the room to resist Trump’s tariff onslaught without blinking.
S&P Global Ratings on Tuesday said high US tariffs are unlikely to impact India’s long-term growth prospects “Exposure of India to the US in terms of exports is just 1 pc of GDP. So, even though tariffs remain high, we don’t think it will have an overall impact on India’s long-term growth prospects. Short term, it might have some marginal hit to growth, over a longer term, we believe India’s growth story remains sound,” S&P Global Ratings Director YeeFarn Phua said.
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The government is also considering extending support to export sectors worst hit by tariffs, trying to cushion the blow for businesses.
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Domestic consumption insulates from external shocks
Unlike some export-reliant economies, India’s GDP is primarily driven by domestic consumption, not trade. More than 60% of India’s GDP comes from internal demand which includes household consumption, services and infrastructure. This cushions the economy against external trade shocks.
Moreover, India is actively pursuing tax reforms, including a major restructuring of the Goods and Services Tax (GST). This restructuring is expected to lower tax rates on essential goods and improve compliance, directly benefiting consumption. As disposable incomes rise and domestic demand strengthens, GDP growth will get a further boost, offsetting export losses to a large extent.
The proposed GST reforms through a two-tier tax structure and lower tax rates on household goods will boost consumption by Rs 1.98 lakh crore, as per an SBI Research Report. Taking together the benefits of income tax tax rate cuts announced in the Budget for the current fiscal, the combined impact of both measures amounts to an additional Rs 5.31 lakh crore of consumption expenditure in the economy. This translates into approximately 1.6 per cent of GDP, as per its estimates. The consumption boost will have a multiplier impact on different sectors of the economy.
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Spotting opportunity in crisis
Rather than yielding to Trump’s tariff pressure, India is using this adversity as a launchpad for deeper economic reforms. Prime Minister Narendra Modi has recently spoken of “next-generation” reforms aimed at unlocking growth bottlenecks and enhancing competitiveness. The GST overhaul is just the beginning. Reforms in logistics, digital infrastructure, labour laws and capital markets can be next in line.
“Your usual policy levers are not going to work very well in the current environment,” Dhiraj Nim, an economist at Australia & New Zealand Banking Group Ltd, has told Bloomberg. “So, the only way out is for you to undertake those slightly tougher reforms.” PM Modi has set up two high-level panels to focus on the policy changes needed. One of the committees, which met last week for the first time, is led by Cabinet Secretary TV Somanathan and will focus on state-level deregulations, an official familiar with the matter told Bloomberg. The second panel is led by Rajiv Gauba, a member of the government think tank Niti Aayog, which will prepare recommendations for the next-generation reforms highlighted by Modi, the person said.
For the government, Trump’s tariff shock isn’t just a crisis but also an opportunity to double down on structural transformation. By pushing reforms now, India is not just responding to a challenge, but laying the groundwork for a stronger, more resilient economy in the future.
Diversifying trade away from the the US
India is also actively de-risking its trade exposure to the US by building new partnerships. It has signed a Free Trade Agreement (FTA) with the UK, and is in advanced talks with the European Union and even with Russia. These markets could serve as alternative destinations for India’s goods, reducing dependence on the US.
A government official has told PTI that India has requested the UK to fast-track approval of the Comprehensive Economic and Trade Agreement (CETA), which was signed on July 24, so that it comes into force as early as possible. With the European Union also, “we are fast-tracking our negotiations,” he said. Meanwhile, talks with Oman have concluded, and the deal may be signed when dates are decided mutually by both countries. With the 10-nation Asean bloc, the review negotiations for the free trade agreement in goods are happening.
India and the Russia-led Eurasian Economic Union (EAEU) on Wednesday signed the Terms of Reference (ToR) in Moscow to launch negotiations on a Free Trade Agreement.
Amidst the thaw in India-China relations, a study by ICRIER has said India needs to explore untapped export potential with China. As per the study India’s untapped export potential to China is estimated at $161 billion – almost ten times the actual export value, 74% of which is in medium and high-tech sectors unlike the composition of current exports which are concentrated in primary, and resource-based sectors. India needs to adopt an export diversification strategy and target items with high export potential such as telephone sets, aircraft, turbojets, motor vehicle parts, and photo-semiconductor devices.
India’s refusal to sign an imbalanced trade deal with Washington sends a signal: New Delhi will engage on its own terms, not out of compulsion. As global supply chains reconfigure amid geopolitical shifts, India’s strategic alignment with other emerging economies, particularly in Asia and Africa, will further cushion the blow of losing some market share in the US.
Trump’s 50% tariff move is without doubt a severe blow. But India’s response isn’t rooted in mere economic nationalism or defiance for its own sake. It is backed by sound economic logic. With macroeconomic strength, a resilient domestic market, reform momentum and diversified trade relations, India is well-positioned to weather the storm, and possibly come out stronger.
(With inputs from agencies)