Indian economy prepares for long haul as Trump tariff strikes home

Going by the escalation in the attack on India in the past few days over its purchase of Russian crude oil, New Delhi’s unrelenting stance and the apparent breakdown in the direct links with US President Donald Trump and his administration, the chances of an early resolution to the tariff logjam seem to be receding. India, instead, appears to be preparing for a long haul.

The attacks, launched simultaneously by several close Trump confidants, overlook the largest buyer of Russian crude oil which is China, other buyer Turkiye, and the EU, the largest beneficiary of Russian liquefied natural gas (LNG), with its import jumping to €4.4 billion in the first half of 2025, from €3.47 billion in the same period last year. The EU has declared that it would put a ban on LNG by the end of 2027.

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By singling out India, Trump advisors make it apparent that it may not just be about ending the Russia-Ukraine war but something more (more about it later).

Intensified attack on India

Trump’s trade advisor Peter Navarro renewed his attack on Thursday (August 28), a day after the penalty tariff of 25 per cent came into effect, describing the Russia-Ukraine war as “Modi’s war” in an interview with Bloomberg TV.

He repeated the phrase even when the interviewer said, “You mean Putin’s war”. He dangled a bait: “India can get 25 per cent off tomorrow if it stops buying Russian oil”.

The Indian government has devised a three-pronged strategy to deal with the fallout of the 50 per cent US tariff on the domestic front: (a) diversify trade (b) provide financial support to labour-intensive export sectors and (c) boost domestic consumption through GST cuts

Curiously, Navarro also attacked India for cosying up to China and Russia, declaring Chinese President Xi Jinping and Russian President Vladimir Putin as “authoritarians”. Soon after, he posted on X: “This isn’t just about India’s unfair trade – it’s about cutting off the financial lifeline India has extended to Putin’s war machine”.

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Another top Trump advisor, Kevin Hassett, directly tied to the US’s penalty tariff on India, threatened the South Asian nation on the same day in another interview: “If the Indians don't budge, I don't think President Trump will”.

A day earlier, when the penalty tariff came into effect, US Treasury Secretary Scott Bessent had accused India had “dragged out the trade negotiations”, adding, “on top of that, there’s the issue of Russian crude purchases, which they’ve been profiting from”.

While India has consistently maintained that its Russian oil purchase is linked to energy security and driven by market dynamics, it also acknowledges that there could not be any movement on its trade negotiations with the US till this issue gets resolved.

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But why is India being singled out, and why has Russian oil suddenly become a hot topic for the US?

Russian oil central to tariffs

India began importing Russian oil in significant amounts only after the Ukraine war broke out in 2022, with the full knowledge and support of the US, to stabilise global oil prices. It also exported its refined products to Europe. This was disclosed by former US ambassador to India Eric Garcetti at a public function in Washington in May 2024.

The first talk about sanctions for trading with Russian oil surfaced when Republican Senator Lindsey Graham talked about it on June 22 on a TV channel and named China and India in this context. He proposed a 500 per cent tariff on such countries.

Soon after the penalty tariff came into effect, he wrote on X on Thursday: “India is experiencing the cost of supporting Putin. To the rest, you will soon too.”

Also read: Pall of gloom descends on India as Trump penalty inches in

War deadline and trade

Trump himself threatened sanctions against countries trading with Russia on July 28, without naming India. When he first gave a 50-day deadline to Russia to stop the war on July 14, he had not brought trade into it. His direct threat to India came on August 4, when he said he would “substantially raise” the tariff – having dismissed both India and Russia a few days earlier as “dead economies”. The final strike came on August 6.

Meanwhile, another development took place.

On July 11, Finland-based independent think tank Centre for Research on Energy and Clean Air had said “fossil fuel exports are a key enabler of Russia’s military buildup and brutal aggression against Ukraine”.

Also read: Trump’s 50 pc tariff on Indian goods takes effect as US doubles import duties

Its report named China (47 per cent), India (38 per cent), the EU (six per cent) and Turkiye (six per cent) as the top buyers of Russian crude between December 5, 2022, and June 30 this year. It named the EU as the largest buyer of Russian pipeline gas during the same period, purchasing 37 per cent of Russia’s pipeline gas, followed by China (30 per cent) and Turkiye (27 per cent).

Why does US pick on India?

So, why does the US appear to pick on India?

Rahul Singh, a former Defence Ministry official, seems to have the answer.

He writes in The Wire: “The main engine driving Trump’s imposition of the massive 50% tariff on Indian goods (with some exceptions) is India’s defiance of his demand that it abandon its huge oil purchases from Russia. These purchases strengthen Russia and reduce Trump’s leverage in negotiating a deal to halt and end the war in Ukraine, which is preventing the US from accessing Ukraine’s mineral resources after the ban on transfer of rare earths to the US by China.”

He adds, “There is alarm in the US high tech industry, especially the electronics sector, which is dependent on these rare earth metals for various defence and other high-tech applications including for the fabrication of advanced semiconductors.”

Change of tune

Recall how Trump humiliated Ukrainian President Volodymyr Zelenskyy in the White House in February this year but changed his tune just a few months later after the Ukrainian leader signed a deal giving the US access to his country’s rare earth minerals.

These minerals, such as graphite, titanium and lithium, are critical to renewable energy, military technology and infrastructure.

The US is heavily dependent on China for rare mineral products, which forced Trump’s hand a few months ago when he slashed tariffs from 145 per cent to 30 per cent in return for the restoration of supply.

But things are no longer working. On Monday (August 25), Trump threatened China with 200 per cent tariff as the latter started controlling supply again.

Direct link broken?

India hired a third lobbying firm, Mercury Public Affairs, this month to intensify its diplomatic efforts in Washington DC. It already has two groups working for it for several years – SHW Partners LLC and BGR Associates.

Meanwhile, German publication Frankfurter Allgemeine Zeitung (FAZ) reported earlier this week that Trump tried to talk to Prime Minister Narendra Modi four times in recent weeks, but the Indian leader refused to take the calls. It didn’t name the sources, and neither the US nor India confirmed it.

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These developments reinforce the suspicion in both countries that the direct links between the two governments have broken. Besides, Trump’s own unpredictability presents a big concern for India. What if he changes his mind after India makes an offer and demands something else?

India’s strategies

The Indian government has devised a three-pronged strategy to deal with the fallout of the 50 per cent US tariff on the domestic front: (a) diversify trade (b) provide financial support to labour-intensive export sectors, particularly MSMEs, and (c) boost domestic consumption through cuts in GST rates and ensure enough liquidity in the economy.

Diversifying trade is not as easy as it sounds. Exporters say it would take upward of a year to secure new markets. The hardest hit sectors are the labour-intensive ones, and they face the stiffest challenge because European and other advanced economies (the US is a very liberal and unreplaceable market, they assure) have stricter quality and regulatory standards: stringent quality tests, auditing, internationally accepted labour practices and environment-friendly energy sources for manufacturing.

Given that these sectors are dominated by smaller companies (MSMEs), the challenges are big.

Modi in Japan, China

One positive development, however, has been rapid diplomatic engagements.

The Prime Minister is visiting Japan, from where he will travel to China to attend the Shanghai Cooperation Organisation (SCO) meet, where he is expected to meet Jinping and Putin. Government sources assert that these meetings are not just diplomatic niceties but attempts to improve economic relations, in view of Trump’s tantrums.

Improvement in diplomatic ties will help, but can the domestic companies, long pampered with protectionist tariffs, poor quality and regulatory oversights, suddenly turn competitive to find a foothold in new markets?

Both China and Russia have supported India against the US penalty tariffs. They have had several rounds of engagements at various levels and have agreed to ramp up the trade ties.

India is also normalising its ties with Canada. Both countries named their high commissioners to each other’s territory on Thursday, which were vacant for about a year following a row over the killing of a Khalistani separatist, Hardeep Singh Nijjar, on Canadian soil in June 2023.

Relief packages

The government is promising relief packages of Rs 25,000 crore. The fate of the Export Promotion Mission (EPM) announced in the budget with an outlay of Rs 2,250 crore is not known either.

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On Monday, Reserve Bank of India Governor Sanjay Malhotra said the central bank had pumped in enough liquidity but would do “whatever else is required to support growth, and including those sectors which may be impacted more by higher tariffs in the US”. The lowering of GST rates, to be given a final shape at the GST Council meet scheduled for September 3 and 4, would surely come as a relief to consumers ahead of the festive season.

But all these efforts are knee-jerk and desperate attempts to navigate the current crisis – not part of long-term strategies to address the fundamental weaknesses in the economy.

Knee-jerk reactions

Improvement in diplomatic ties will help, but can the domestic companies, long pampered with protectionist tariffs, poor quality and regulatory oversights, suddenly turn competitive to find a foothold in new markets?

Similarly, factors such as relief packages, easy credit, and interest subventions may provide temporary relief, but can they turn India into a manufacturing-exporting hub?

These are the real questions the government should focus on in an equal measure.