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In an unprecedented move, the US has imposed 50% tariffs on Indian exports, combining a 25% reciprocal levy with an additional 25% ad valorem duty, effective from August 27, 2025. The action, aimed at penalising India's continued purchase of Russian oil, represents one of the most severe tariff measures ever directed by the US against a trading partner. Beyond its immediate economic repercussions, this development carries strategic weight reshaping India's trade dynamics, testing its export resilience, and altering the contours of its geopolitical engagement.
This article examines the potential fallout across key export sectors, while also outlining the strategic pathways India must consider ranging from trade diversification and deeper FTA linkages to policy initiatives that can strengthen competitiveness in a rapidly evolving global order.
The US tariff shock is hitting some of India's most vulnerable and labor-intensive export sectors. Textiles and apparel, Gems and jewellery, Sea food, Chemicals; heavily dependent on the US market, face eroded margins, risks of job losses and losing market share. Automotive components, along with marine products, leather, footwear, and chemicals all highly price-sensitive face disrupted supply chains and squeezed competitiveness, as global buyers may shift orders to ASEAN suppliers.
While these sectors grapple with uncertainty, a few industries have escaped the brunt. Sectors such as pharmaceuticals, smartphones, and renewables have been exempted, providing some relief and stability.
At an overall level, the tariff escalation threatens to dent India's export growth, disrupt MSME-heavy clusters, and undermine competitiveness in global markets. While certain industries remain shielded, the uneven impact highlights the urgent need for India to diversify its trade partners, strengthen resilience across vulnerable sectors, and accelerate efforts to reduce reliance on any single market.
The Government has moved quickly to cushion exporters from the US tariff shock while preparing for long-term resilience. A key relief measure is the extension of import duty and AIDC exemption on cotton till December 31, 2025, easing input costs for the textile and apparel sector. Beyond such steps, policymakers are considering broader export support for MSMEs, which form the backbone of India's export ecosystem.
Parallelly, the Export Promotion Mission is being ramped up to unify fragmented schemes and push Indian goods and services globally through better market intelligence, stronger branding, logistics efficiency, and sector-specific support. With WTO norms already being tested by the unilateral tariff actions of the US, it is imperative for the Indian government to re-examine its export incentive framework and contemplate granting additional export incentives particularly for exporters serving the US market.
On the domestic front, a consumption stimulus through a GST rate cut effective October 2025 is expected to lift household spending and boost domestic demand, with economists projecting a positive contribution of 0.35–0.45 percentage points to GDP growth by FY2027. This is designed to partly offset external trade headwinds by strengthening India's internal growth engine.
Complementing this is the Government's self-reliance agenda under Atmanirbhar Bharat, which continues to prioritise high-tech and strategic sectors. Recent initiatives include boosting local capacity in semiconductors, expanding India's defense manufacturing base and offering PLI Schemes to sectors ranging from electronics to pharmaceuticals. Together, these initiatives aim to reduce vulnerability to global supply chain disruptions while creating high-value export opportunities.
Finally, India is diversifying trade ties through FTA talks with the Eurasian Economic Union, review of the ASEAN pact, and fast-tracked negotiations with the Gulf region and the EU. These moves aim to reduce overdependence on the US and open new markets across developed and emerging economies.
For India, the path forward lies in a multi-pronged trade and economic strategy that both mitigates immediate risks and lays the foundation for long-term resilience. A critical first step is market diversification through FTAs. The ongoing review of the India–ASEAN FTA provides an opportunity to address trade imbalances, tighten rules of origin, and unlock deeper access to one of the world's fastest-growing regions. At the same time, a calibrated re-entry into the Regional Comprehensive Economic Partnership (RCEP) could give Indian exporters preferential access to major markets such as China, Japan, and Australia offsetting some of the disruption caused by US tariffs.
Equally significant are the FTAs under negotiation with the Eurasian Economic Union (Russia, Belarus, Kazakhstan), Australia, the Gulf bloc (Oman, GCC, Saudi Arabia) and Peru, as well as advanced talks with the European Union. Collectively, these agreements can broaden India's reach beyond traditional partners and provide opportunities across diverse sectors.
However, signing new trade agreements alone is not sufficient. Domestic readiness will be the true determinant of success. India must strengthen compliance frameworks, ensure exporters are aligned with international standards, and build capacity in sectors that stand to benefit. Equally important is robust support for SMEs, which remain the most vulnerable to tariff shocks. Access to affordable export credit, expansion of digital trade platforms, investment in multimodal logistics, and streamlined trade facilitation will be crucial in enabling MSMEs to tap into new markets.
Alongside external strategies, India must boost domestic demand through GST rationalisation, stronger rural consumption, and expanded PLI schemes to build a resilient internal growth engine. At the same time, promoting "Brand India" in sectors like pharmaceuticals, IT, renewables, and advanced manufacturing can strengthen global competitiveness. Strategically, India will need to balance ties with emerging partners such as Russia, Eurasia, and China while deepening relationships with the EU, UK, and other Western economies. Together, these steps go beyond defending against US tariffs, positioning India to recast its trade architecture into one that is resilient, diversified, and globally integrated.
India is at a crucial turning point as it faces one of the toughest tariff actions ever taken by the US. To move forward, the country needs to diversify its export markets, adopt flexible trade strategies, and strengthen its domestic economy. Speeding up FTAs, boosting self-reliant manufacturing, and giving extra support to vulnerable export sectors will help India shift from being on the defensive side to shaping its own global trade story.
The goal should not be just to recover from this setback, but to build a stronger, more resilient future; one where India reduces overdependence on a single market, creates new trade partnerships, and drives growth from within. This is the moment for India to rebuild with confidence and emerge strategically stronger.
Dipika Shetye, Associate Director, Tax, Grant Thornton Bharat, has also contributed to this article.
This article first appeared in the Taxmann on 1 September 2025.