No deal: Trump's tariffs have increased uncertainty for Indian economy

The prolonged discussions had raised fears that India and the United States (US) may not be able to reach a mutually beneficial trade deal before the August 1 deadline. US President Donald Trump on Wednesday announced India would pay a 25 per cent tariff on exports to America from August 1. Aside from the headline tariff rate, Mr Trump’s overall message, posted on Truth Social, was not encouraging. In addition to his usual stance that India has high tariffs and the US has done relatively less business here, he  mixed up the issue with India’s oil imports from Russia. The message noted that India would have to pay a penalty. Although it was not immediately clear what a penalty would mean, it could be additional tariffs over and above the 25 per cent announced.

 

The announcement is clearly damaging for Indian exporters, along with the Indian government. For some time, it appeared that India was making progress on a trade deal with the US because it did not figure on the list of countries to which Mr Trump sent unilateral letters earlier this month. On several occasions, Mr Trump himself boasted that a big deal with India was coming. It is worth noting that India was one of the first countries to start negotiating with the US after its April announcement of the so-called reciprocal tariffs. However, none of these seems to have worked. The US is India’s largest trading partner, and India ran a goods trade surplus of over $40 billion in 2024-25, with exports worth over $86 billion. Since several other countries have got favourable deals, including developed economies and blocs such as the United Kingdom and European Union, India would struggle to export to the US market.

 

As things stand, it would also put a question mark on some of the recent investments in India by large multinationals in an attempt to diversify from China. In the present situation, even purely on a tariff basis, Vietnam will become more attractive. Now that it is clear that the negotiations with the US have failed, the government would be well advised to put details in the public domain to the extent possible. It has been reported in recent days and weeks that India was not willing to open up certain sectors, particularly agriculture. It will be worth debating whether what India got eventually could have been avoided. Besides, is there a possibility of continuing the dialogue and arriving at some sort of deal in the near term?

 

To be fair, from India’s point of view, the way Mr Trump got other countries to agree on trade deals was problematic. Such countries have been offered a relatively low flat tariff in return for near-free access to US goods. It is hard for India to accept any such agreement, given its developmental needs and livelihood concerns. However, what India has got is not pleasing, either, and will have an impact on output and employment. The tradeoffs will now have to be carefully studied. Assuming this tariff remains in force in the foreseeable future, India’s growth outlook needs to be appropriately adjusted. Notably, the International Monetary Fund on Tuesday raised India’s growth projection for the current year and the next. In the Trumpian World, such projections don’t seem to have even a 24-hour shelf life.