In face of US tariffs, global volatility, India must maintain a steady hand

Indian Express

3 days ago

US-India trade relations — anchored in democratic values and growing strategic convergence — have entered a more challenging phase. The recent imposition of 25 per cent-plus tariffs on Indian exports by the US adds stress to trade negotiations. While the two nations continue to underline their commitment to a strong partnership, evolving geopolitical dynamics and economic nationalism are reshaping the context in which the partnership operates.
The core of the dispute lies not just in tariffs or market access. While India's prudent refusal to open its agricultural and dairy markets remains a sticking point for Washington, a deeper unease stems from India's energy and defence ties with Russia. As India expanded its crude oil imports from Russia — from around 2 per cent of total imports in FY22 to around 36 per cent in FY25 — largely due to wartime discounts, Western discomfort has grown. However, with those discounts now shrinking, India has fresh room to diversify its sources — including LNG and crude from the US — potentially turning friction into an opportunity for recalibration.
On the trade front, the impact of tariffs cannot be ignored. Indian exports to the US constitute just over 2 per cent of GDP — a modest share by global standards — but their composition matters. Sectors such as textiles, chemicals, pharmaceuticals and auto components will face the brunt. The tariff shock could cost India up to $30 billion in export earnings, affecting supply chains, employment and GDP momentum in the short term. Yet India's economic structure — rooted in strong domestic consumption — offers it a cushion many export-heavy economies lack.
Still, the broader global environment remains volatile. A slowdown in emerging markets, ongoing capital outflows and rising financial uncertainty are contributing to short-term pressures. July saw foreign portfolio investors pull more than $1.4 billion from Indian markets, and the Rupee weakened nearly 2 per cent, ranking among the weaker emerging market currencies in the month. A depreciating currency feeds into imported inflation, raises the cost of foreign debt and adds complexity to monetary policymaking.
This leaves the Reserve Bank of India (RBI) with a delicate balancing act. Inflation is benign —expected to average around 3 per cent in FY26 — but the case for rate cuts is not straightforward. The RBI must weigh global interest rate trajectories, volatile capital flows and exchange rate dynamics while ensuring domestic growth remains on track. In this climate, the central bank's credibility, communication and consistency become as important as its policy tools.
While Washington's growing dissatisfaction with India's defence procurement — still dominated by Russian-origin systems — is understandable, India's position is pragmatic. Legacy dependence is being steadily addressed through increased indigenous production, joint ventures and expanded purchases from Western partners, including the US. This evolving defence landscape can, in fact, serve as a strategic bridge rather than a barrier.
India is not alone in facing US tariff actions. Even close allies such as the UK, EU, Japan, and Vietnam have faced similar measures. The pattern suggests a larger trend — Washington's push to narrow its current account deficit through selective protectionism and reduced import dependence. In such a world, economic diplomacy is becoming more tactical than rule-based.
India's approach must be anchored in smart bargaining — leveraging its strategic relevance without compromising its domestic priorities. Any 'mini-deal' that emerges will have to go beyond symbolic relief to address structural irritants across agriculture, energy access, and technology transfer.
Despite near-term volatility, India's market fundamentals remain sound. Key drivers such as financial services, consumer goods and technology are relatively insulated from trade tensions. However, short-term market volatility is inevitable, driven by high valuations and policy uncertainty. Sectors like auto components could even gain, as US tariffs on Chinese and Mexican parts create demand for alternatives. Pharmaceuticals and electronics — so far exempt from US tariffs — also continue to perform well. Recent earnings softness and valuation concerns may create short-term noise, but long-term investor confidence remains intact.
India's lower export dependency gives it strategic room but it must not foster complacency. As global trade dynamics shift — shaped by US-China tensions, evolving WTO norms and mounting economic nationalism — India must respond with agility, diversification, and diplomatic foresight. By carefully balancing its energy sources, defence partnerships and trade positions, India can emerge not just as a resilient economy but as a shaping force in the evolving global order. In this fluid environment, India's steady hand and long-term vision are not only essential for its own growth but increasingly important for global economic stability.
The writer is professor of Finance, XLRI Xavier School of Management and is with the BJP