Representative image
| Photo Credit: Reuters

The immediate impact of recent U.S. tariffs on Indian exports may appear limited, but their secondary and tertiary effects on the economy pose challenges that must be addressed, the Finance Ministry said in a report on Wednesday (August 27, 2025) amid the U.S. effecting a steep 50% tariff on shipments from India.

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Ongoing India-U.S. trade negotiations are critical in addressing these issues, including the secondary and tertiary effects of high tariff by the US on Indian goods, the monthly economic review released by the Ministry said.

The steep 50% tariff on Indian goods entering the U.S., which came into effect from Wednesday (August 27, 2025), would impact exports worth more than $48 billion. The sectors which would bear the brunt of the high import duties imposed by the Trump administration include textiles/ clothing, gems and jewellery, shrimp, leather and footwear, animal products, chemicals, and electrical and mechanical machinery.

“While the immediate impact of recent U.S. tariffs on Indian exports may appear limited, their secondary and tertiary effects on the economy pose challenges that must be addressed. In this context, the ongoing India-U.S. trade negotiations will be crucial,” it said.

In line with the global shift towards diversification and strategic realignment, it said, India is actively pursuing a diversified trade strategy to sustain its resilient trade performance.

“This includes the recently concluded FTA with the UK and EFTA and ongoing FTA negotiations with the US, EU, New Zealand, Chile, and Peru. But, these initiatives will take time to show results and may not fully address the shortfall in exports to the US that may arise if the current tariff rates on India persist,” it said.

Observing that India’s economy stands at a critical juncture, the report said, its strong economic performance over the past few years, along with policy stability and high infrastructure investment, has earned it a sovereign rating upgrade by S&P from ‘BBB-‘ to ‘BBB’.

“This upgrade serves as a testament to the economy’s robust macroeconomic fundamentals and ongoing reform initiatives. The assessment comes at a moment when the economy has exhibited considerable resilience in the face of global challenges, with strong domestic demand and prudent policy management contributing to economic stability,” it said.

On the domestic front, the report said, aided by above-normal precipitation and better sowing of kharif crops, the headline inflation may remain moderate in the near term.

“An increased market arrival in Q1, comfortable buffer stocks and better output prospects, coupled with stable global oil markets, might keep the prices of food grain moderate. The downside risks to global growth are likely to keep international commodity prices in check, partly offsetting the impact of higher tariffs,” it said.

To enhance economic growth amidst the challenging global landscape, the Prime Minister has announced a few initiatives focusing on policy reforms.

First, the creation of a Task Force for Next-Generation Reforms aims at further simplifying regulations, lowering compliance costs, and fostering a more enabling environment for startups, MSMEs, and entrepreneurs, it said, adding, the planned rollout of next-generation GST reforms in the coming months, with an emphasis on reducing the tax burden on essential items, is expected to provide direct relief to households and boost consumption demand.

Complementing these measures, the rating upgrade is anticipated to reduce the borrowing costs, attract greater foreign capital inflows, widen the access to global capital markets, boost disposable income, reduce inflationary pressures, cut input costs for businesses, and support growth, it said.

Amid global uncertainties, these government initiatives are charting a growth trajectory driven by long-term reforms that will boost disposable income, reduce inflationary pressures, and reduce costs for businesses, it said.

It further said that the government’s focus on employment generation through schemes like the PM Viksit Bharat Rozgar Yojana, combined with reforms in the education sector and skill development initiatives, aims to create a workforce that is well-prepared for the demands of the changing world.

Taken together, these reform initiatives and the improved sovereign rating will underpin growth by encouraging investment, stimulating consumption, increasing employment opportunities and strengthening confidence in the economy’s long-term trajectory, it added.

Published – August 28, 2025 02:27 am IST

US President Donald Trump
| Photo Credit: AFP

US President Donald Trump announced plans Thursday for sweeping “reciprocal tariffs” hitting both allies and competitors, in a dramatic escalation of an international trade war that economists warn could fuel inflation at home.

Speaking in the Oval Office, Trump said he had decided to impose the reciprocal duties, telling reporters that US allies were often “worse than our enemies” on trade issues.

The levies would be tailored to each US trading partner and consider factors including value added tax (VAT).

Trump has announced a broad range of tariffs targeting some of the biggest US trading partners since taking office, arguing that they would help tackle unfair practices — and in some cases using the threats to influence policy.

The president has referred to tariffs as a way to raise revenue, remedy trade imbalances and pressure countries to act on US concerns.

Trump’s announcement came hours before he was due to meet Indian Prime Minister Narendra Modi in Washington.

It remains unclear when exactly the tariffs would take effect, if imposed.

Analysts have warned that reciprocal duties could bring a broad tariff hike to emerging market economies such as India and Thailand, which tend to have higher effective tariff rates on US products.

Countries such as South Korea that have trade deals with Washington are less at risk from this move, analysts believe.

Inflation concerns

Cost-of-living pressures were a key issue in the November election that saw Trump sweep to power, and the Republican has promised to swiftly reduce prices.

But economists caution that sweeping tariffs on US imports would likely boost inflation, not reduce it, in the near term and could weigh on growth eventually.

Trump’s nominee for commerce secretary Howard Lutnick, however, has pushed back on the idea that duties would cause widespread inflation, even as certain costs might rise.

Trump’s deputy chief of staff for policy Stephen Miller previously said countries use the VAT to get an unfair trade advantage, although analysts have challenged this characterization.

During election campaigning, Trump promised: “An eye for an eye, a tariff for a tariff, same exact amount.”

For example, if India imposes a 25-percent tariff on US autos, Washington will have a 25-percent tariff as well on imports of autos from India, explained a Nomura report this week.

The consideration of non-tariff factors might shift this calculus.

Modi will hold talks with Trump on Thursday and New Delhi offered some quick tariff concessions ahead of his visit, including on high-end motorcycles.

“Trump’s objective of implementing reciprocal tariffs is to ensure fair treatment for US exports, which could indirectly also address US trade imbalances with partner countries,” analysts at Nomura said.

Among Asian economies, India has a 9.5-percent weighted average effective tariff on US exports, while there is a three-percent rate on India’s exports to the United States.

Thailand has a 6.2-percent rate and China a 7.1-percent rate on US products, Nomura noted.

Higher tariffs are often imposed by poorer countries, who use them as a tool for revenue and protection because they have fewer resources to impose non-tariff barriers, Cato Institute’s Scott Lincicome earlier told AFP.