Setback or a signal to pivot?

The recent decision of the US to impose a 50% tariff on a range of Indian exports has sent shockwaves through the stakeholders of all sectors, from diamond cutters of Surat to textile manufacturers of Tiruppur.

The US has framed the hike in tariffs as part of a more general protectionist push to revive American manufacturing. As the dust settles, the question is whether Indian exports will buckle under pressure or pivot and bounce back.

The new tariffs will have an impact on apparel, jewellery, electronics and certain auto components. American policymakers have framed the move in terms of “unfair trade practices” and “domestic abuses”. Industry insiders and trade economists believe that it is not about the trade balance but political calculation ahead of the US elections.

As stated by the Indian Commerce Ministry, these product lines constitute a considerable share of India’s non-oil merchandise exports to the US, which can impact long-term growth and employment in major sectors.

India exported textiles and clothing products worth $21.35 billion during April-October of FY 2024-25, a 7% rise year-on-year. Of this, ready-made garments accounted for $8.73 billion, with the US being a major buyer.

But India could gain a comparative advantage and these exports are unlikely to become uncompetitive after the 50% tariff. How so? Other competitors like Vietnam (46% tariffs), Bangladesh (37%) and Sri Lanka (44%) have a higher aggregate tariff burden, making Indian goods relatively cheaper for American retailers even in a protectionist regime.

The penalty might actually bolster India’s global garment supply chain position— at least for a while.

However, it would be naïve to expect smooth sailing. Margins within the garment manufacturing industry are incredibly small, with the price rupturing expected to impact small and medium exporters the most. The hubs of knitwear and woollens in India, Tiruppur and Ludhiana, are reporting uncertainties in orders.

Gems and jewellery:  The gems and jewellery industry is impacted to a far greater extent. The sector is a $32 billion space, of which $10 billion is exported to the US. The SEEPZ Special Economic Zone (SEZ) in Mumbai, where more than 50,000 artisans work, exports 80-85% of its jewellery to the US.

The new tariff will hurt. According to news agency Reuters, manufacturers are fearing a sharp fall in orders and many are warning of job loss and foreign exchange inflows loss. Other than textiles, this segment has no cushion of differential global tariffs or diversified markets.

Pharmaceuticals: One crucial segment that has escaped the new US tariff sweep is the pharmaceutical industry. India’s drug exports, estimated at around $25 to $26 billion annually, have been left untouched. Of this, the US alone imports nearly $9.8 billion, accounting for more than a third of India’s pharma trade.

The reasoning isn’t hard to trace. Indian drugmakers supply a substantial share (about 40%) of generic medicines sold in the American market, making them a vital link in the US healthcare chain. Rather than risk disruption in medical supplies, Washington appears to have chosen pragmatism over protectionism in this case.

That said, exporters remain cautious. They fear future hurdles may not come in the form of tariffs but through stringent FDA compliance norms, pricing regulations, or intellectual property challenges, which can equally impact earnings and access.

There have been reports floating around suggesting that India now commands 44% of US smartphone imports—a figure that remains unsupported by credible trade data. While India’s electronic manufacturing capacity has grown under initiatives like Make in India, its role in the global value chain for high-end electronics, especially smartphones, is still modest compared to giants like China and South Korea.

In the automotive component sector, India has been gradually increasing its footprint in the US, particularly in areas like precision engineering and aftermarket supplies. However, unlike textiles or pharmaceuticals, this industry does not yet have the scale or resilience to absorb sudden tariff hikes. The effects will likely be limited to specific high-value suppliers rather than causing broad sectoral tremors.

Challenge or catalyst?

In the immediate term, a 50% tariff across key product categories will undeniably hit Indian exporters, particularly those in labour-intensive sectors like garments and jewellery. But this development could also act as a strategic trigger, encouraging Indian industries and policymakers to rethink trade dependencies and expand into new markets across Europe, Africa and Southeast Asia.

The situation underscores the importance of improving productivity, quality standards and cost competitiveness. India’s Production Linked Incentive (PLI) schemes and infrastructure investments tied to the Viksit Bharat@2047 vision are timely, and if implemented efficiently, they can help neutralise external trade shocks.

Additionally, there is a growing emphasis on improving export financing mechanisms, tightening quality assurance norms and diversifying trade settlements—including the use of local currencies for cross-border transactions—to shield micro, small and medium enterprises (MSMEs) from volatility.

While the new tariffs may seem like a setback, they could also be a defining moment in India’s evolving export strategy. The future lies not in retaliatory moves but in deepening trade partnerships, negotiating favourable free trade agreements (FTAs) and strengthening domestic value chains.

Ultimately, the question is not just about withstanding tariffs, but whether India can turn adversity into an opportunity and reposition itself as a more resilient, diversified and innovation-driven export economy.

(Taru is an assistant professor,
Department of Economics, Christ Deemed to be University, Bengaluru; Manu is an assistant professor,
Department of Economics, Alliance University, Bengaluru; Vivek is a research assistant, Department of
Economics, Christ University,
Bengaluru)