Tariffs and the chicken-out game: Will India hold out till November 2026?

The supreme irony of the many ironies swirling around the United States–India tariff row is that petroleum product exports to the US from Indian refineries will not attract the tariffs announced by Donald Trump to “punish” India for importing crude oil and natural gas from Russia. That oil & gas is feedstock for India's exports of petrol, diesel, kerosene and lubricants. Much has already been written about the hypocrisy of the US importing uranium compounds and fertilisers from Russia, so let’s not go there.

 

From an investment and trading perspective, it’s clear there is no upside to tariffs for either nation. India would lose access to the world’s largest economy, with desi goods priced out of contention. In 2024, goods trade between the two nations amounted to $129 billion —$42 billion in US exports and $87 billion in Indian exports. Those numbers would nosedive.

 

The American consumer (and US-based manufacturers) would pay a lot more for whatever they import, wherever they import it from. Manufacturers and importers would pass on the costs — it’s already happening. For example, the Tata group fabricates aircraft fuselages for Boeing. These are precision components and the manufacturer cannot be easily replaced. So Boeing might hike the price of its planes.  

Higher prices will mean inflation for Americans, which will lead to a demand dip. That will also mean the US doesn’t realise enough in the way of tariff revenues to compensate for the loss of tax revenues from strong consumption.

What does a big tariff do to India’s economy? Many sectors derive a large component of their revenues from exports to the US. Sectors like pharmaceuticals, auto components, and textiles will be hit very hard. Other businesses, with lower exposure to the US will shrug and look for other markets. The stock market will adjust with a string of downgrades once tariffs are a done deal.

 

Indian-owned businesses in the US, like Novelis (a subsidiary of Hindalco) will have to retool supply chains. Novelis imports its raw material from Canada (which also faces tariffs); auto manufacturers with US subsidiaries, like the Mahindra Group, will have to find workarounds for Indian components. Ditto for MNCs like Siemens and ABB, if they have US exposures, since they integrate their Indian subsidiaries into global value chains.

The demands made by Donald Trump are impossible to meet. Politically speaking, there is no way the Narendra Modi government can easily open up agriculture. There is also no way in which India can stop buying Russian oil, without taking a huge hit to its trade balance. India will also incur higher costs and run into logistic and engineering issues if it does buy US oil & gas as it did offer to do.

 

There are few levers for India to exploit to try and change Mr Trump’s mind. The Modi government lacks the nerve to impose crazy countervailing tariffs as China did, as a bargaining counter. Cynically, India could offer to buy lots of defence goodies, negotiate a better deal and then renege, if Mr Trump becomes a lame duck after elections in November 2026. Defence deliveries take a long time. It would take several years to deliver the first F-35, if India ordered some this weekend. So there is the possibility of committing to a defence deal and subsequently cancelling, if tariff problems ease.

 

This brings us to the other variables — the politics of the situation. Mr Trump is not legally capable of imposing tariffs without consent of the US Congress. Right now, that’s not a problem for him since Republicans hold majorities in the House of Representatives and the Senate. But there is a good chance that the Democrats could flip the House and just maybe, the Senate too, if Mr Trump’s policies bite voters hard enough. So it may be a question of enduring the tariff pain until November 2026.

 

Finally, oldtimers may recall what traders used to call the “Greenspan Put”. Whenever the economy was struggling, the former Federal Reserve Chairperson, Alan Greenspan (he served as Fed Chair from 1987-2006) would make an incomprehensively convoluted speech and then ease money supply. It didn’t matter what Greenspan said; he would reliably ease money supply. Some traders are now speaking in terms of the “TACO put”. It doesn’t matter what Mr Trump says, as long as he always chickens out.