Trump's 50% Tariff Threatens India's Manufacturing Ambitions

Yahoo

2 days ago

(Bloomberg) -- India's largest shoemaker Farida Group had already staked out the land — a 150-acre plot in southern Tamil Nadu — for a sprawling new export facility. Then came the blow from Washington: President Donald Trump announced he was doubling tariffs on Indian exports to 50%.
For Farida, which supplies brands like Cole Haan and Clarks and depends on the US for about 60% of its business, the impact was immediate. New orders stopped. The 10 billion rupee ($114 million) project froze.
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'With 25% tariffs, you can still work, you can give some discount, negotiate with the buyer and make some adjustments in your profits,' Rafeeque Ahmed, the company's chairman, said in an interview. 'At 50%, you don't have anything.'
Farida is hardly alone. Trump's move would give India the highest tariff rate in Asia, threatening a manufacturing sector that Prime Minister Narendra Modi has spent a decade trying to build to take on the likes of China. The 'Make in India' campaign was supposed to lift manufacturing to 25% of the economy. Last year, it stood at just 13% — lower than the 16% in 2015, according to World Bank data.
The last few years did offer glimmers of the future Modi had envisioned. Apple Inc. scaled up iPhone assembly in India, making the country the second-largest smartphone producer after China. Pharmaceuticals and green tech have also gained ground. The US — whose policies and actions accelerated companies' adoption of a 'China Plus One' strategy to diversify supply chains — is now India's biggest export market and one of its top sources of foreign investment.
That progress is suddenly vulnerable. While the tariff hike spares smartphones and pharmaceuticals for now, it puts the rest of India's $87 billion in US-bound exports on the line.
'Forget China Plus One right now. Companies are thinking India Plus One,' Ahmed said. 'They are making plans to move out of India.'
India's Ministry of Commerce and Industry didn't immediately respond to a request for comment.
Trump says the tariff hike is punishment for India's purchase of discounted oil from Russia, which he argues helps fund President Vladimir Putin's war on Ukraine. But India was the only major economy to be hit with such 'secondary tariffs,' even though China is the largest overall buyer of Moscow's crude.
If the 50% rate holds, Bloomberg Economics estimates US-bound exports from India could fall by 60% and put nearly 1% of gross domestic product at risk. Without exemptions for pharmaceuticals and electronics, the decline could reach 80%. Even the earlier 25% rate — already higher than in Vietnam, Malaysia or Bangladesh, was enough to threaten a 30% drop in exports. For comparison, Chinese goods face about a 30% US tariff.
'In addition to the economic challenge, politically it's difficult for Prime Minister Modi that India now pays a higher blanket rate than China,' said Alexander Slater, head of the India practice at consulting firm Capstone.
China is pressing on other fronts as well. Beijing wants to limit tech transfers and equipment exports to India and Southeast Asia, aiming to deter companies from relocating production, Bloomberg previously reported. China's rare earth curbs also hit Indian automakers earlier this year.
At the same time, Trump's tariffs have opened the door for closer India-China ties. Direct flights may resume as soon as next month, and Beijing has eased restrictions on urea exports to India. The two sides are discussing resuming border trade of locally made goods after more than five years, Bloomberg reported on Thursday.
What Bloomberg Economics Says...
'In a no-deal scenario, we estimate a drag of up to 1.5 percentage points on long-term potential GDP growth, relative to our optimistic outlook of 9% by 2030. The impact is likely to stem from weaker sentiment, lower investments, falling exports and a setback to India's manufacturing ambitions.'
— Chetna Kumar. For the full analysis, click here.
On the factory floor, anxiety over the US tariff is palpable. Ajay Sahai, chief executive officer of the Federation of Indian Export Organisations, said exporters could see demand fall 20% in the short term. The timing couldn't be worse: summer 2026 orders are being placed right now, but with tariffs sitting at 50%, buyers are balking.
'I've been getting 80 to 90 calls every day concerning these issues from exporters seeking solutions and ways out,' he said. 'It's difficult to do business in such a tariff environment.'
Some factories are slashing prices to hold on to customers. The only way to retain buyers is by giving huge discounts, said Sudhir Sekhri, managing director at apparel maker Trend Setters Group. Spring and summer orders account for roughly 65% of his firm's revenue.
In Mumbai, Sharad Kumar Saraf, managing director of Technocraft Group, which produces scaffolding, textiles and other goods, is running the numbers to reduce costs for buyers. About a third of its sales are headed for the US. 'Additional tariffs is unwarranted and uncalled for and will impact our trade severely,' he said.
There's still the possibility for a reprieve. US and Indian officials are continuing trade talks, with the hopes of landing the first tranche of a bilateral trade deal this fall that could dial back tariffs. Trump will also meet Putin in Alaska this week to discuss Ukraine — any breakthrough there could strengthen the case for dropping America's oil-related levies.
But time is not on India's side. The longer the uncertainty drags on, the more companies will start looking elsewhere. India's share in many of these product categories is small and US brands can shift their supply chains quickly if they decide to, said P Senthilkumar, partner at Vector Consulting Group.
The tariff threat feels personal for Farida Group, whose shoe plants employ about 23,000 people, with over half producing for the US. Every paused shipment or canceled order brings painful choices — whether to halt or slow production, or let go of staff who have spent years honing their craft.
'You can't take business decisions in such uncertainty,' said Ahmed. 'What will happen to workers? Shall I send them back? They have been with me for years, they are skilled workers, I can't just send them back.'
'Workers would be one of the biggest sufferers,' he added.
--With assistance from Yasufumi Saito.
(Updates with details of India-China talks in 13th paragraph)
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