Trump's tariff tsunami: Is India doomed, or is there any good news?

Mint

2 days ago

Tariffs are piling up on India. There's a base rate, a penalty, and perhaps an additional rate for pharmaceuticals and semiconductors. Experts agree that tariffs will reduce exports, curtail growth, impact jobs, and hurt investor sentiment. Growth forecasts for 2025-26 have already been revised downwards.
But is the situation all gloom and doom? Not necessarily. India has some advantages and a few opportunities that can be harnessed to minimize the economic damage.
An important consequence of tariffs is that it has forced a rethink of India's export strategy. In 2024-25, 20% of India's merchandise exports went to the US. The world's largest economy is our largest export partner; it buys more from India than the next three export partners put together.
This makes India vulnerable to US policy shifts. But Trump's threats have been a wake-up call—reportedly, the government is exploring ways to tap new markets in Africa, Latin America and Eastern Europe.
Data on region-wise exports support this diversification plan. Broadly, three trends have emerged over the last eight years. One, North America and Europe have seen the biggest gains in export shares; clearly, these markets are already well-covered by Indian exporters.
Two, exports to Asean and Gulf countries are growing steadily: these markets have a stable demand for Indian products.
Three, exports to Latin America, Africa and the Commonwealth of Independent States (excluding Russia) are growing at a high rate, albeit on a low base: these are the geographies with the potential to absorb exports from India, and they should be the areas of focus in terms of export promotion.
Friendly FDI
Since 2000-01, India has received more foreign direct investment (FDI) than it sends out, ensuring a positive net FDI position. A rise in outward FDI threatens this balance: in 2024-25, net FDI is estimated to have plunged to an all-time low. The US, which used to be among India's top three FDI source countries, is turning protectionist. This has pushed India to court investment from friendly countries, with the output to be sold domestically or exported to countries other than the US.
Some of this 'friend-shored" FDI is already in place. The EV factory set up by Vietnam's Vinfast in Tamil Nadu plans to supply locally and serve as an export base. The collaboration between Indian and the UAE shipyards to develop world-class ship repair clusters in India will serve both local and international fleets. In this new world order, India's FDI pitch need not rely only on its large domestic market; indeed, it is well-positioned to be an export hub for South Asia and Africa.
Favourable rate cycle
RBI's frontloading of rate cuts has set up an easy monetary cycle, with low inflation, abundant liquidity, and falling cost of funds. A comfortable monetary situation offsets the challenging external environment by stimulating domestic demand. Domestic consumption can cushion the economy when export growth is poor. In a recent speech, Prime Minister Narendra Modi urged Indians to buy locally made goods; cheaper credit is one way to boost household purchases.
The flip side of low rates is a fall in bond yields. Between April and July 2025, foreign portfolio investors (FPIs) have sold $3.5 billion of debt. Fortunately, after plunging to an eight-year low in May, US-India yield differentials have started rising again: a wider rate gap would make Indian bonds more attractive. The differential is unlikely to close soon, because even if the US Fed cuts rates in September, the RBI's rate pause in August has given it the space to deliver a cut later in the year, if required.
Fiscal space
India's fiscal prudence has bought the government some fiscal space. Retaining fiscal flexibility is important for two reasons. First, bond markets track fiscal metrics and penalize excessive indebtedness. For example, India's 10-year yield has come down in the last year, aligning with the RBI's rate easing; whereas the US 10-year yield has gone up, despite the fact that the US Fed started cutting its policy rate six months earlier than the RBI. Clearly, markets are worried about rising US debt as well as the impact of Trump's policies on economic growth.
Second, the current level of policy uncertainty may require fiscal support, especially for MSME exporters directly impacted by tariffs. A ₹2,250 crore export promotion mission was announced in the budget; more wage support or credit lines may be needed depending on the trade situation. Given the uncertainty around tariffs and trade, having the resources to extend budgetary support is a confidence booster.The author is an independent writer in economics and finance.