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The United States imposed 25% reciprocal tariffs on India’s exports with effect from August 7. On August 6, the U.S. imposed a penal levy of an additional 25% on India’s exports because India continued to import oil from Russia and this comes into effect on August 29, 2025. The two taken together can weaken India’s exports to the U.S. We first examine the impact of the 25% tariff and, later, the impact of the penal rates.

India runs a merchandise trade surplus with the U.S. — for 2024-25, it stood at $41.18 billion — which is increasing over time. To narrow this trade surplus, the U.S. appears to focus both on India’s exports and imports. While a 25% reciprocal tariff could hamper India’s exports, the penalty could work on exports as well as serve as a non-tariff barrier on crude imports from Russia, thus, pushing India to import crude from the U.S. or elsewhere at a higher cost. While the U.S.’s measures could reduce the trade gap between the two countries, it is important to understand its implications on India’s growth and external account. Such unilateral actions are contrary to the principles of free and fair trade.

Impact of reciprocal tariffs

The immediate impact of reciprocal tariffs would be on the trade balance. Assuming that there is no impact on imports from the U.S. (except for a limited diversification of oil imports from Russia to the U.S.), tariffs could adversely impact India’s exports to the U.S. But to what extent? Assuming that the import elasticity with respect to tariffs as (-)1, which is on a higher side, India’s exports to the U.S. can go down by 25% — this is a sharp decline. However, its impact on trade balance depends on how much the share of India’s exports to the U.S. is in total exports. As the data for 2025-26 is not available, the implications of this expected drop in U.S. exports is worked out for 2024-25, ex post.

Even in the extreme case, where elasticity is assumed to be (-)1, the overall trade deficit widens by about 0.56 % of GDP to 7.84%. Consequently, real GDP growth drops by about 0.6% to 5.9% from 6.5%. What is of more concern is its impact on the Current Account Deficit (CAD). Due to the U.S.’s reciprocal tariffs, the CAD is estimated to increase from 0.6% to 1.15%. While these estimates are for 2024-25, the extent of the impact in 2025-26 would not be very different from these estimates for 2024-25, had the tariffs been effective from the beginning of the year. However, in the current year (2025-26) four months are behind us, the decline in GDP growth rate may be 0.4%, and correspondingly the CAD may also be reduced.

Some caveats

These estimates are, however, subject to some caveats. India recently signed a comprehensive economic and trade agreement with the United Kingdom, while negotiations are underway with the European Union and other major countries and their impact on external account is not assessed. These may have a favourable effect on the CAD.

We are also not considering the effects of tariff increases imposed on other countries that are competitors for Indian exports, and this can moderate the impact on India’s exports. Further, we are not taking into consideration any likely changes in the exchange rate due to the recent U.S. trade measures and its impact on trade balance. Indeed, the rupee-U.S. dollar depreciated sharply and was hovering over ₹87.5 since reciprocal tariffs were imposed. The new trade agreements as well as rupee depreciation could help narrow the CAD a bit and also limit the impact of the U.S. tariffs on India’s GDP growth to some extent.

But for 2025-26, and for the coming years, GDP growth, even after considering these two factors, could still be lower by about 0.5% than the base case growth forecast of 6.5%; the CAD could also widen by a similar extent. Further, following the penalty threat, any larger shift away from Russia on crude imports and towards the U.S. might have further implications on the CAD as well as the exchange rate and domestic inflation. Added to this, an increase in world oil prices and the uncertainty surrounding the world economy could exert more pressure on the CAD and its financing. It can also have an effect on inflation.

How can India mitigate the downside risks of Donald Trump’s tariffs? One option is that India still has the space to negotiate with the U.S. as the trade deal has not yet been finalised while not yielding on contentious issues such as agriculture and allied sectors and micro, small and medium enterprises.

The other way is, as many have suggested, to diversify the export market. But this would be difficult in the short term. One possible way is to look at our own tariffs that we impose on our imports. Our empirical results do suggest that India’s exports are negatively affected by import tariffs. The estimated elasticity with respect to import tariffs is more than (negative) one. With the increasing import content of our exports over time, the negative impact of tariffs on exports growth has only increased. The government may look at the existing tariff rates and may reduce those that have an adverse effect on exports.

Impact of penal levy

The impact of the penal levy, which is another 25%, will have the same effect as reciprocal tariffs. However, there are some commodities that are exempt from this levy. Here the impact will be somewhat lower. Taken together, the total impact on India’s growth rate can be quite severe, a reduction of over 0.6 percentage points from the base growth rate of 6.5% in the current year. To avoid the penal levy, India has to bring to the attention of the world at large the inequity of the decision. It is highly discriminatory. There are many other countries which import from Russia far more than what India does. The interval of three weeks that is available now for negotiation must be effectively utilised.

Reciprocal tariffs with penal levy are a clear case of using tariffs to compel nations to follow a specific policy. India needs to work with other nations to get back to a different system of world trade. While the immediate impact of the tariffs on the growth rate of India may be managed, the continuation of this kind of trade regime will not be in the interests of all countries including the U.S. and India.

C. Rangarajan is Chairman, Madras School of Economics, Chennai. N.R. Bhanumurthy is Director, Madras School of Economics, Chennai

Published – August 09, 2025 12:16 am IST

A man stands next to a logo of the Reserve Bank of India (RBI) in Mumbai.
| Photo Credit: Reuters

India’s current account deficit (CAD) widened marginally to $ 9.7 billion (1.1% of GDP) in Q1:2024-25 from $8.9 billion (1.0% of GDP) in Q1:2023-24 and against a surplus of $4.6 billion (0.5% of GDP) in Q4:2023-24, according to dada released by the Reserve Bank of India (RBI) on Monday (September 30, 2024).

The current account surplus for Q4:2023-24 was revised downwards to $4.6 billion from US$ 5.7 billion earlier due to an upward adjustment of customs data on merchandise imports, the RBI said.

“The widening of CAD on a year-on-year (y-o-y) basis was primarily due to a rise in merchandise trade deficit to $ 65.1 billion in Q1:2024-25 from $56.7 billion in Q1:2023-24,” the RBI said.

Net services receipts increased on a y-o-y basis to $39.7 billion in Q1:2024-25 from $ 35.1 billion a year ago. Services exports have risen on a y-o-y basis across major categories such as computer services, business services, travel services and transportation services.

Private transfer receipts, mainly representing remittances by Indians employed overseas, increased to $29.5 billion in Q1:2024-25 from $ 27.1 billion in Q1:2023-24, as per RBI data.

Net outgo on the primary income account, primarily reflecting payments of investment income, increased to $10.7 billion in Q1:2024-25 from $10.2 billion in Q1:2023-24.

In the financial account, net foreign direct investment inflows increased to $6.3 billion in Q1:2024-25 from $ 4.7 billion in the corresponding period of 2023-24.

Net inflows under foreign portfolio investment moderated to $0.9 billion from $ 15.7 billion in Q1:2023-24 and net inflows under external commercial borrowings (ECBs) to India amounted to $1.8 billion in Q1:2024-25, lower than $5.6 billion in the corresponding period a year ago.

Non-resident deposits (NRI deposits) recorded net inflows of $ 4.0 billion, higher than $ 2.2 billion a year ago.

There was an accretion of $5.2 billion to the foreign exchange reserves (on a BoP basis) in Q1:2024-25 as compared with $24.4 billion in Q1:2023-24, the RBI said.

India recorded a current account surplus of $5.7 billion or 0.6% of GDP in the March quarter, the Reserve Bank of India said on June 24.

In the year-ago period, the current account deficit stood at $1.3 billion or 0.2% of GDP, and the same was $8.7 billion or 1% of GDP in the preceding quarter ending December 2023.

For FY24, the current account deficit narrowed to $23.2 billion or 0.7% of GDP against $67 billion or 2% of GDP in FY23, the RBI said in a release on the Developments in India’s Balance of Payments.

In January-March 2024, the merchandise trade deficit stood at $50.9 billion, lower than the $52.6 billion a year ago.

Net services receipts at USD 42.7 billion were higher than the $39.1 billion on the back of a 4.1% growth in the segment, the central bank said, adding that this helped in swinging the current account into the surplus territory.

Net outgo on the primary income account, mainly reflecting payments of investment income, increased to $14.8 billion from $12.6 billion a year ago, the data released by the RBI said.

Private transfer receipts, which mainly represent remittances by Indians employed overseas, grew 11.9 per cent to USD 32 billion in the March quarter.

The non-resident deposits also surged to $5.4 billion in January-March compared to $3.6 billion in the year-ago period.

Net foreign direct investment flows were $2 billion in Q4 FY24 against $6.4 billion a year ago.

Foreign portfolio investment recorded a net inflow of $11.4 billion during the quarter compared to a net outflow of $1.7 billion a year ago.

Net inflows under external commercial borrowings to India were $2.6 billion against $1.7 billion.

In FY24, the portfolio investment recorded a net inflow of $44.1 billion against an outflow of $5.2 billion a year ago, while net FDI plummeted to $9.8 billion from $28 billion in FY23, the RBI said.

Aditi Nayar, Chief Economist, Head of Research and Outreach at ICRA, said “India’s current account turned to a welcome surplus in Q4 FY2024 after a gap of ten quarters, with the size of the same, at $5.7 billion, exceeding ICRA’s more modest expectations. The turnaround to a surplus in Q4 FY2024 from a deficit in the year-ago period, was primarily driven by a narrowing in the merchandise trade deficit print to a ten-quarter low of $50.9 billion in Q4 FY2024 from $69.9 billion in Q3 FY2024.

Aided by a narrower merchandise trade deficit and a robust expansion in the services trade surplus, India’s current account deficit (CAD) more-than-halved to a seven-year low of $23.2 billion in FY2024 from $67 billion in FY2023. As a proportion of GDP, it eased to a mild 0.7% from 2.0% in FY2023.

ICRA expects the CAD to rise slightly in FY2025, while remaining eminently manageable at ~1.0-1.2% of GDP, owing to a widening in the merchandise trade deficit in this fiscal, on the back of domestic demand and higher commodity prices. In particular, we have assumed an average price of the Indian basket of crude oil of $85/barrel. A CAD of 1.0-1.2% of GDP in FY2025 would be comfortably financed, particularly given the expectations of large FPI-debt inflows on account of the bond index inclusion starting end-June 2024.”

Madan Sabnavis, Bank of Baroda chief economist said “India’s current account balance recorded a surplus of US$ 5.7 billion (0.6% of GDP) in Q4:FY24 as against a deficit of US$ 8.7 billion (1.0% of GDP) in Q3:FY24 and US$ 1.3 billion (0.2 per cent of GDP) a year ago [i.e., Q4:FY23].

For the full year, the deficit moderated to US$ 23.2 billion (0.7% of GDP) during FY24 from US$ 67.0 billion (2.0% of GDP) during the previous year on the back of a lower merchandise trade deficit which was at $ 242 bn against $ 265 bn last year.

Net invisibles receipt was higher during 2023-24 than a year ago, primarily on account of services and transfers. Software receipts were up from $ 146 bn to $ 160 bn in gross terms. Gross Transfers too were up from $ 112 bn to $ 119 bn. This helped to improve the CAD.

Portfolio investment recorded a net inflow of US$ 44.1 billion as against an outflow of US$ 5.2 billion a year ago. In the run-up to inclusion of Indian bonds in JP Morgan bond index there were long positions taken by investors in the market thus pushing up debt inflows.

Net FDI inflow was US$ 9.8 billion during 2023-24 as compared with US$ 28.0 billion in 2022-23. This slowdown can be attributed to lower flow of funds from developed countries to emerging markets.

In 2023-24, there was an accretion of US$ 63.7 billion to the foreign exchange reserves.

For FY25, going by the early trends, the CAD should be manageable at 1-1.5% of GDP and the steady capital inflows should ensure that the balance of payments which reflect the fundamentals remain comfortable. This will also keep rupee range bound at Rs 83-84/$ with external factors like strength of the dollar guiding the currency.”

(With inputs from The Hindu Bureau)

Reserve Bank of India Governor Shaktikanta Das. File
| Photo Credit: EMMANUAL YOGINI

“With India’s current account deficit (CAD) declining sharply to 1% of GDP in Q2:2023-24 from 3.8% in Q2:2022-23,” RBI Governor Shaktikanta Das on February 8 said going ahead, the net balance under services and remittances would remain in large surplus, partly offsetting the trade deficit. 

“India’s services exports remained resilient in October-December 2023, driven by software, business and travel services. Moreover, with around 10.2% share in world telecommunications, computer and information services exports, India is a significant player in the world software business,” Mr. Das said in his statement. 

He said according to the World Bank, with an estimated $135 billion in inward remittances in 2024, India would remain the largest recipient of remittances globally.

On the financing side, Mr. Das said the net foreign direct investment (FDI) stood at $13.5 billion in April-November 2023 as compared with $19.8 billion a year ago.

“Foreign portfolio investment (FPI) witnessed a sharp turnaround during 2023-24 (up to February 6) with net FPI inflows of $32.4 billion as against net outflows of $6.7 billion a year ago,” he said. 

“Net accretions to non-resident deposits and net inflows under external commercial borrowings were also higher during the year,” he added. 

“As on February 2, 2024, India’s foreign exchange reserves stood at $622.5 billion .46 Vulnerability indicators suggest greater resilience of India’s external sector. We are confident of comfortably meeting all our external financing requirements,” he further said. 

Oil pump jack is seen in front of displayed Israeli flag in this illustration taken, October 8, 2023.
| Photo Credit: Reuters

A protracted Israel-Hamas conflict could spur oil prices beyond India’s comfort zone and even if the government holds retail fuel prices ahead of critical elections, wholesale prices may spike and a higher import bill could pressure the rupee, according to experts.

Brent crude oil prices rose over 3% on Monday, crossing $87 a barrel even as equity markets around the world, including India, came under pressure as investors turned risk-averse and rushed to safe haven assets like gold.

Fears of a wider conflict between Israel and Hamas not only pulled down the NSE Nifty 0.72% or 141.2 points to 19,512.4, but also dragged trading volumes on the NSE to “the lowest in many weeks”, said Deepak Jasani, head of retail research at HDFC Securities.

Broad market indices fell more than the Nifty even as the advance-decline ratio fell sharply to 0.28:1, he added, stressing that the conflict is the latest negative trigger for markets that are already fretting about macroeconomic uncertainties in Europe and China, hawkish central banks and rising oil prices.

Also read: Israel-Palestine conflict LIVE updates on October 9

Beyond the short-term effect on markets, Bank of Baroda chief economist Madan Sabnavis said that if the war persists for even a fortnight or more, the oil dynamics will change. Crude oil prices going beyond $90 a barrel would pose trouble for the world economy as well as India.

“Iran joining the fray can affect the sea routes and push up transport and insurance costs. Higher crude prices will distort our balance of trade and current account deficit, thus putting pressure on the rupee,” Mr. Sabnavis noted.

For the government, there could be fiscal implications. With elections looming in several States and for the Lok Sabha in 2024, raising fuel prices may be an unlikely option, but higher costs will have to be absorbed either by oil marketing firms or the exchequer.

“Retail inflation can still be controlled by the government if it chooses to keep fuel prices unchanged. But wholesale price inflation will increase for sure. Some airlines have already increased fares after ATF price hikes, which is also inflationary,” the economist said.

Export earnings could also be hit as Israel buys around $5.5-6 billion of refined petroleum products a year from India.

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