India holds its ground for now as Trump slaps 25% tariff and threatens penalty for trade with Russia

Straits Times

5 days ago

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Like Mr Trump, whose policies revolve around his domestic Maga base, Mr Modi is also a nationalist leader who cannot afford to ignore his domestic constituency.
– The Modi government found itself in an unenviable position with limited choices after US President Donald Trump levied a 25 per cent tax on India from Aug 1 and threatened India with an additional penalty for doing business with Russia.
Still, analysts noted, India's best bet is to continue negotiating a trade agreement, which has been stuck over the quantum of American access into the Indian market, particularly in the agriculture and dairy sectors.
After calling India a 'friend', Mr Trump blasted India in a Truth Social post on July 30, saying the South Asian country had 'the most strenuous and obnoxious non-monetary Trade Barriers of any Country'.
He also warned that India would have to pay a 'penalty' for buying a large portion of its military equipment from Russia and is 'Russia's largest buyer of ENERGY, along with China'.
India had hoped its close ties with the US and shared concerns over the growing assertiveness of China would shield it from the worst of the tariffs.
Instead,
at 25 per cent,
the tariff
on India
is
higher than that for most of its Asian peers, including Japan at 15 per cent, as well as for the EU, also at 15 per cent.
India's oil bill is expected to go up and exports to the US in pharmaceuticals and electronics, among others, are set to become less competitive.
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Modi can't afford to ignore domestic constituency
Still, Mr Trump's latest tariff threats are being viewed in India as a negotiating tactic to push for greater access into the Indian market.
For now, the Indian government appeared to be holding its ground, saying it would protect farmers and small businesses, underlining how the stakes are high for Prime Minister Narendra Modi.
'The government will take all steps necessary to secure our national interest, as has been the case with other trade agreements,' the ministry of commerce and industry said in a statement on July 30.
Commerce minister Piyush Goyal said in Parliament the next day that the government is studying the implications of the US tariffs and assessing how it can protect India's trade interests.
Like Mr Trump, whose policies revolve around his domestic Maga base, Mr Modi is also a nationalist leader who cannot afford to ignore his domestic constituency and provide unfettered access to American businesses.
Commentators noted that Mr Trump, in all likelihood, is pushing for a deal like the ones clinched with Indonesia or Japan, pushing for zero duties on a majority of goods from the US.
A key sticking point in talks has been over India giving the US greater market access in India's agriculture and dairy sectors. Indian farmers, a strong domestic lobby, have opposed the entry of American produce.
Given that over 60 per cent of India's population is tied to agriculture, the domestic political fallout for Mr Modi far outweighs the US tariff threats, said Dr Biswajit Dhar, a trade economist and former professor at the Jawaharlal Nehru University.
'The government of India actually stood up to the pressure by Trump and the American administration. We sort of walked down the path that China had done. This is what is expected of a large country,' noted Dr Dhar, echoing the widespread sentiment that India had to stand up to the bullying tactics.
'It is impossible for the Indian government to accept opening up these two areas (agriculture and dairy). The political consequences would be huge. The Indian government's resistance in negotiations was entirely justified. It makes good economic sense.'
Any cards left to play?
Analysts noted that Indian negotiators in trade talks would be banking on an assessment that Mr Trump would not want the cost of drugs or iPhones to go up in the US market due to the 25 per cent and above tariff.
The US is India's largest export market, with exports to the country reaching US$79.44 billion (S$102.9 billion) by 2024. India's exports to the US – accounting for 18 per cent of its total exports – include gems and jewellery, pharmaceuticals and textiles.
'India will be hoping that at least pharmaceuticals will be spared, as they were earlier,' Dr Amitendu Palit, senior research fellow and research lead (trade and economics) at the NUS Institute of South Asian Studies.
'The other hope is that negotiations are continuing and a breakthrough is possible in the coming weeks,' he added.
India also has some room to manoeuvre – unlike export-oriented South-east Asian countries, India still remains a services-led economy. Over half of India's GDP comes from the service industry, compared with just about 17 per cent from the manufacturing sector.
Ms Radhika Rao, a senior economist and executive director at DBS Bank, assessed that, ultimately the US tariff would come down through negotiations.
'Factoring in sectoral exemptions (such as pharmaceuticals) and the likelihood of follow-up discussions, the effective rate might settle into the new indicative baseline range of 15 to 20 per cent, levelling the field with (India's) regional competitors,' she said.
Mr Goyal had stated over the weekend that trade discussions between India and the US had been 'progressing very well'. Mr Trump himself said on several occasions that a deal was imminent.
One sector with large exposure to the US market is smartphones, where India has overtaken China to become the top exporter of smartphones to the US, according to research firm Canalys on July 28.
The firm noted that smartphones assembled in India accounted for 44 per cent of US imports of the device in the second quarter of 2025, up from 13 per cent for the same quarter the previous year.
'This likely means iPhones will become more expensive for Americans, but there is a high chance that this might not be the final tariff number, as we have seen with other countries like Japan,' said Mr Tarun Pathak, research director at Counterpoint Research, a global technology market research firm.
'For India, we believe that it will continue to gain more production volume for iPhones – the cost difference between China and India is still there due to tariffs and other variables. Since iPhones are not yet manufactured in Vietnam – which still has a 20 per cent tariff – the main implication is that unless Apple decides to absorb the extra cost or gets an exemption, it will likely be passed on to consumers,' he added.
Apple assembled US$22 billion worth of iPhones in India in the 12 months ending March 2025 – a 60 per cent increase over the previous year – according to earlier reports.
Mr Trump has also threatened Apple with additional tariffs and urged the company's CEO Tim Cook to make iPhones domestically.
Penalty for ties with Russia a 'blackmail'
Mr Anup Wadhawan, a former commerce secretary, said the most 'alarming' part of Mr Trump's litany of complaints against India is the penalty for doing trade with Russia.
'We are a low per capita economy; incomes are low and we have a poverty challenge. It is a lifeline to get cheap oil. And as far as defence procurement from Russia is concerned, it is age-old. We cannot accept his kind of blackmail,' he said.
Mr Trump has not revealed the details of the penalty yet.
In a separate post on Truth Social on July 31, a day after Mr Trump announced tariff of 25 per cent for India, he said: 'I don't care what India does with Russia. They can take their dead economies down together, for all I care. We have done very little business with India.'
India has long practised a policy of strategic autonomy, refusing to be drawn into a formal alliance with the US, while maintaining longstanding relations with Russia, dating back to when they were Cold War allies.
Under Mr Trump, this policy of strategic autonomy has come under pressure, as he has also targeted the Brics grouping – which counts India, Russia and China as members – for its efforts to look for dollar alternatives.
Russia had also provided India with military equipment when the West refused to do so. India's External Affairs Minister S. Jaishankar had said that Western countries opted for a military dictatorship in the region as its 'preferred partner' and did not supply arms to New Delhi for decades, in a thinly veiled reference to the US' ties to Pakistan.
An estimated 68 per cent of Indian weaponry is still of Russian origin even though defence imports from Russia have been declining as India has expanded its procurement to include countries such as Israel and the US.
Amid the US threats, India's Minister of Petroleum and Natural Gas Hardeep Singh Puri had earlier said that India is prepared to diversify oil imports if Russian supplies are affected by sanctions.
Ties with Pakistan
The India-US trade deal has also come under intense domestic scrutiny in India, following Mr Trump's repeated assertions that he engineered a ceasefire between India and Pakistan with the threat of cutting trade with both countries.
India and Pakistan were embroiled in a four-day military conflict in May after India blamed Pakistan for a terror attack in Kashmir, in which 26 people were killed.
The Indian government has continued to deny that Mr Trump brokered the ceasefire or that it was related to trade issues, but it has come under fire on this issue in Parliament, which discussed the military conflict with Pakistan this week.
'I think the government is also stuck after Pakistan. They wouldn't like to take on another political problem,' said Dr Dhar.
Mr Trump said on July 30 that Washington has reached a trade deal with Pakistan. But neither side has disclosed the agreed tariff rate.
Still, Mr Wadhawan noted that India-US ties would ride out this difficult phase.
'He can't afford to destroy a relationship that is very old and deep across all dimensions. There is a huge people-to-people element to it; there is a huge Indian diaspora (in the US). It is a blip,' he said.
'But there will be short-term pain.'