Why Trump tariff could seriously dent Indian economy in multiple ways

Make no mistake, US President Donald Trump’s 25 per cent tariff plus unspecified penalty will seriously dent the Indian economy in multiple ways – if not reversed quickly. Not just the direct trade with the US, it will hit India’s trade with Russia and Iran, devalue the rupee, weaken market sentiment, cut down investment and cause massive job loss.

Also read: As Trump’s tariffs threaten WTO, can India play a role in restoring order?

While the 25 per cent tariff is Trump’s strike against India for not making enough tariff concessions nor opening up some sectors like agriculture and dairy to US exports, the unspecified penalty is for buying weapons and oil from Russia – while the latter is in a war with Ukraine – which will make the tariff even higher.

It has already kicked up a storm and distress stories are pouring in.

Oil trade takes immediate hit

India’s oil trade has already been hit as major oil PSUs like Indian Oil, Bharat Petroleum and Hindustan Petroleum have stopped buying Russian oil from the spot market. These oil PSUs buy 40 per cent of their crude oil from the spot market and control 60 per cent of India’s refining capacity.

Also read: India among top 6 target slabs as Trump unleashes tariff tsunami

Private oil companies have also been hit due to sanctions. Nayara Energy, which runs India’s third largest refinery and Russian oil major Rosneft is its major stakeholder, was sanctioned on July 18 by the European Union for its oil trade with Russia. Global shippers and traders are now shunning it.

The US imposed Iran-related sanctions on eight more Indian companies soon after Trump’s tariff strike on July 31. It had sanctioned four other Indian companies in February 2025 for the same reason. India’s import of Iranian oil has dried up after 2018, when Trump cancelled the nuclear deal and put sanctions on Iran.

Also read: Higher tariffs to impact US more than India: SBI Research

In sharp contrast, India’s oil import from Russia surged after the Russia-Ukraine war in early 2022 – jumping from 0.2 per cent to 35-40 per cent of total crude imports now. Although Russia’s discounted oil didn’t benefit ordinary Indians (retail prices remain unchanged, public and private refiners made windfall gains by exporting to Europe) and the price difference has narrowed since, the threat of penalty is disrupting supply and may lead to higher costs for Indian refiners. That would translate to higher fuel cost and inflation.

More so since India’s oil dependency (reliance on import) has surged, increasing from 77.6 per cent in FY14 to 90 per cent in FY25.

Panic in textile, diamonds, gems and jewellery hubs

Ground reports point to palpable panic in the manufacturing hubs of Surat and Mumbai, particularly in labour intensive diamond, gems and jewellery and textile sectors. Taken by surprise by the magnitude of the tariff hike, small businesses are uncertain about the fate of goods already being manufactured to serve earlier orders and future prospects as their products would lose price advantage. About 35 per cent of Surat’s textile exports goes to the US.

These sectors have been under stress after the Russia-Ukraine war and a dip in global demand.

Disruptions in labour-intensive sector exports mean disproportionate loss of jobs.

Impact on GDP growth

India’s bilateral merchandise trade with the US is massive. During April-May 2025, it stood at $17 billion of the total $76.8 billion exports – or 22 per cent, up from 18.9 per cent in the corresponding period of 2024.

In the past 12 fiscals of FY14-FY25, the US has been one of the two top trading partners of India, altering its place with China – the US topping in five and China in seven fiscals. But the US’s significance is in delivering the maximum surplus – in an area in which India perennially generates deficits. China, on the other hand, accounts for the maximum deficit.

For example, in FY24 (the last for which full fiscal data is available), when the US topped the list, India had a merchandise trade surplus of $35 billion with it, while with China it ran a deficit of $85 billion.

At a total merchandise trade of $119.7 billion in FY24, India-US trade accounts for 3.3 per cent of GDP of FY24 ($3598.9 billion at current prices, dollar exchange rate of Rs 84). This is a very significant number and massive disruption would mean massive damage to the economy.

Most global financial services predict a fall in the GDP growth by 20-40 basis points and predict that it may touch 6 per cent or fall below in FY26 – if the tariffs stay for a year. The RBI’s projection for FY26 growth is 6.5 per cent, while that of the Economic Survey of 2024-25 is 6.3-6.8 per cent.

Cascading effect: Rupee and investment hit

The high tariff will hit growth not only because exports to the US will be down, but also because of many cascading effects.

Stock markets have been hit and so is rupee – which tumbled to over 87.7 on Thursday (July 31) and remained over 87 on Friday (August 1) – close to all-time low of 87.95. Foreign institutional investors (FIIs) continue to pull out amid weak corporate earnings in Q1 of FY26 (which had begun before the tariff strike).

Worsening market sentiment may pull down FDI inflows (long-term investment) too – which touched a new low. The RBI bulletin of May 2025 showed that net FDI inflow fell by 96.8 per cent in FY25 to $353 million – the sharpest fall since FY05 (since when the RBI provides data). This was the fourth consecutive fall in FDI inflows, from $43 billion in FY21.

There would be other effects. India may provide relief to exporters, by diverting capex funds or borrowing from the market – which may reduce the growth impetus or raise fiscal deficit. The RBI may lower the interest rate to help exporters in its monetary policy committee (MPC) meets a few days later – while the US Fed kept its rate unchanged a day earlier. The interest rate differential thus caused would have its own impact on fund flows and rupee value.

To sum up, the tariff strike is the beginning of a vicious circle, the full implication of which will unravel with time.