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US tariffs force India to accelerate diversification plan

Trump 2.0, India-US trade, US tariffs

Indian government is scrambling to shield exporters as 50% US tariffs threaten $240 billion worth of shipments.

US tariffs and trade diversification: The Indian government is scrambling to contain the fallout from US President Donald Trump’s latest tariff salvo. After nearly eight months of negotiations without a breakthrough, Washington has imposed a 50% duty on Indian imports, citing New Delhi’s continued purchase of Russian crude oil. The move has forced the commerce and industry ministry to seek the help of export-oriented states such as Gujarat, Maharashtra, and Tamil Nadu, urging them to cushion labour-intensive sectors hardest hit by the new US measures.

The fresh duties could affect nearly 55% of India’s shipments to the US, with apparel and leather among the worst-hit sectors. The timing is particularly damaging: this is when exporters typically book orders for the American festival season.

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The state export engine

The stakes are high for the top five exporting states — Gujarat, Maharashtra, Tamil Nadu, Karnataka, and Uttar Pradesh — which together account for three-fourths of India’s merchandise exports, worth $437 billion in FY25. Gujarat’s export profile is dominated by petroleum products worth $43.9 billion, followed by engineering goods valued at $16.6 billion, gems and jewellery at $8.3 billion, and textiles at $5.6 billion. Maharashtra’s shipments are led by $22.5 billion worth of engineering goods, alongside $13.7 billion in gems and jewellery, $8.1 billion in chemicals, $5.4 billion in agricultural products, and $3.8 billion in textiles.

Tamil Nadu’s exports are more diversified, including $18.1 billion in engineering goods, $14.6 billion in electronic goods, $8 billion in textiles, and $1.6 billion in leather products. If exports from these states contract sharply, the blow will be felt not only in their state economies but also in employment, particularly in labour-intensive manufacturing hubs.

Three-pronged strategy in the works

The commerce ministry is framing a response built on four broad pillars: export diversification, import substitution, enhanced competitiveness, and targeted sectoral support. At the core of this is the long-delayed ₹2,250 crore Export Promotion Mission, announced in the Union Budget 2025–26. Its rollout is now being expedited to deliver sector-specific subsidies and easier credit to MSMEs struggling with the tariff impact. Alongside this, officials are identifying new overseas markets to absorb surplus production, and in some cases redirecting output to meet domestic demand.

One element of the strategy is the reopening of the Production-Linked Incentive scheme for textiles, following industry requests for expanded support. Another is an ambitious market diversification push, with the target list expanded from 20 to 50 countries, mostly in the Middle East and Africa, which together account for 90% of India’s total exports. The aim is to reduce dependence on a handful of large markets, especially those prone to politically motivated trade measures.

Prime Minister Narendra Modi has sought to bolster this external diversification strategy with a domestic appeal. Reviving the rhetoric of the pre-independence Swadeshi Movement, he has urged citizens, traders, and business leaders to prioritise locally made goods. Traders, in particular, have been asked to commit to stocking and selling only Indian-made products. This emphasis on domestic substitution is intended to reduce reliance on volatile foreign markets and strengthen India’s manufacturing base.

Trade data and potential retaliation

India’s export performance in recent months underscores the urgency of the problem. In June, exports were flat at $35.14 billion, constrained by weak global demand, though the trade deficit narrowed to a four-month low of $18.78 billion. For April–June 2025–26, exports rose by a modest 1.92% to $112.17 billion, while imports climbed 4.24% to $179.44 billion.

If Washington’s tariffs remain in place, New Delhi may have little choice but to consider reciprocal duties on high-profile US exports such as aircraft, crude oil, whisky, and motorcycles. The risk of escalation is real, but selective retaliation may be necessary to signal resolve and deter further coercive measures.

US tariffs: Negotiating room and strategic autonomy

India’s approach to trade negotiations has long been guided by the need to protect agricultural livelihoods, safeguard dairy interests, and ensure energy affordability. These have been consistent sticking points with the US, which benefits from India’s openness in sectors like services and education but offers little reciprocity on areas critical to Indian producers.

Unlike Japan or the European Union, New Delhi is unlikely to grant sweeping zero-tariff concessions that compromise developmental priorities. Strategic autonomy remains a guiding principle, and the government is not inclined to make concessions under duress.

The tariff dispute is unlikely to be resolved quickly. While the economic hit cannot be fully neutralised in the short term, a coherent blend of domestic manufacturing incentives, market diversification, selective retaliation, and targeted export support could soften the blow. The task for the government will be to match speed of execution with diplomatic agility, ensuring that India’s export engine does not stall under the weight of external pressure.

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