The Trump administration’s decision to impose a 50% tariff on Indian goods, effective August 27, 2025, has jolted India’s export sector. The blow falls hardest on micro, small, and medium enterprises (MSMEs) that dominate labour-intensive industries such as textiles, gems and jewellery, leather, chemicals, and food processing. These firms already operate on wafer-thin margins, and the new tariff threatens their survival.
With $33 billion of India’s $87 billion in exports to the US under threat, the central question is whether government and banking sector support can soften the impact.
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MSMEs in the crosshairs
The 50% duty is a combination of two measures: a 25% reciprocal tariff imposed in July and a further 25% penalty linked to India’s continuing trade with Russia. The effect is to wipe out the cost competitiveness of Indian exporters in the US. MSMEs, which account for 45% of India’s total exports, dominate sectors such as textiles (70% share) and gems and jewellery (80% of diamond exports).
Margins of 4–5% leave little room for price cuts. Moody’s Analytics warns that exporters will face sharp margin compression, leading to wage cuts, lower investment, and possibly plant closures. In engineering goods alone, the export loss is projected at $4–5 billion, shaving 0.2–0.5 percentage points off GDP growth.
The fallout is already visible. Export hubs such as Tiruppur (textiles) and Surat (diamonds) report delayed payments, liquidity crunches, and job losses. Distress is deepening, with reports of worker suicides emerging from the diamond industry.
Banks step in with relief
Commercial banks have begun offering targeted relief. Indian Bank and Tamilnad Mercantile Bank, among others, have rolled out temporary interest concessions, waived loan-processing and forex-handling charges, and extended repayment timelines. Some lenders are even considering moratoriums of up to a year for exporters with sound credit profiles.
The Credit Guarantee Fund Trust for Micro and Small Enterprises now covers loans up to ₹10 crore, while a ₹4,000-crore credit guarantee scheme offers 75% coverage for new loans and partial relief for stressed accounts. Exporters are being guided towards Udyam registration to access these schemes. Banks are also improving access to export insurance, offering factoring services to reduce the risk of payment defaults, and conducting outreach sessions to nudge exporters toward markets in West Asia, Africa, and Europe.
Limits of financial cushioning
While these measures provide liquidity, they do not neutralise the tariff shock. A 50% duty doubles the landed cost of Indian goods in the US, leaving exporters with two choices: absorb the cost or lose market share. The shrimp industry illustrates the dilemma. India, the largest US supplier, has already suffered losses of ₹600 crore from order cancellations, while Ecuador is poised to take its place. In textiles, a proposed 5% duty subsidy and a ₹500-crore automation fund will help, but not enough to offset the tariff wall.
Analysts point out that most MSMEs lack the bandwidth to diversify quickly. Only 15% of exporters currently meet the compliance requirements of free trade agreements. Domestic policy does not help either; safeguard duties on steel and paper threaten to raise input costs further.
Diversification as strategy
Long-term resilience depends on breaking free from dependence on the US market, which takes about 5% of India’s $825 billion in exports. Opportunities lie in the India-UK free trade agreement, particularly for textiles and pharmaceuticals, and in potential EU deals that could unlock $10 billion worth of new markets. But trade diversification requires more than intent. Rapid execution of FTAs, trade facilitation measures, and digital platforms for exporters are urgent needs.
At the same time, geopolitical balancing is proving difficult. Talks with Washington on a bilateral deal have stumbled, with a US trade delegation cancelling its visit. Efforts to stabilise supply chains through closer ties with Russia and China are also fraught with political risk.
Bank-led relief measures offer exporters temporary breathing space, and if coupled with the government’s Export Promotion Mission, they may help tide over the immediate crisis. Yet easy credit is at best a palliative. Without structural reforms—diversified markets, stronger local supply chains, and better FTA compliance—India’s $434-billion export engine will remain vulnerable.
For now, the tariff war has exposed the fragility of India’s export base. Unless policymakers and industry move beyond firefighting, the current crisis could foreshadow bigger shocks to come.