By: Gayathri Pramod, Research Analyst, GSDN
In 2025, the United States sharply escalated trade pressure on India through a series of tariff measures that culminated in tariffs of up to 50 per cent on many Indian goods, followed by a later U.S. announcement of a 100 per cent tariff on imports of branded or patented pharmaceutical products. These measures — justified by Washington as reciprocity and, in the case of the oil-linked tariffs, as punishment for India’s purchases of Russian oil — have immediate economic consequences for Indian exporters and financial markets, medium-term effects on growth and competitiveness, and longer-run political and strategic implications for the U.S.–India partnership. This paper examines the multidimensional impacts across economic, political, strategic, technological, and defence domains, assesses Indian policy responses and corporate adjustments, and discusses plausible future trajectories and associated risks. The U.S. decision to substantially raise tariffs on imports from India began in late August 2025 when President Donald Trump announced an additional 25 per cent tariff on top of existing trade barriers, bringing duties on many Indian exports to as high as 50 per cent. The White House framed this move as reciprocity and, in a separate step, imposed higher levies intended as punishment for India’s continued purchases of discounted Russian oil; U.S. officials tied the punitive element to geopolitics. The tariffs affected a wide array of labour-intensive manufactured goods, where India had a large U.S. market share, including textiles, garments, gems and jewellery, footwear, furniture, and certain chemicals. The levies took effect promptly, after five rounds of bilateral trade talks had failed to produce a comprehensive agreement. The tariff escalation was followed in late September 2025 by a U.S. announcement that, starting October 1, imports of “branded or patented pharmaceuticals” would be subject to a 100 per cent tariff — a move described by Washington as a policy to incentivize onshore manufacturing and reduce the U.S. pharmaceutical industry’s reliance on foreign supply. These measures, by design and by effect, have strained economic ties and tested the resilience of the wider strategic partnership between the two democracies.
Effects on Economy: Trade, Firms & Macroeconomy
The most immediate and measurable channel through which the tariff war impacts India is trade flows and firm profitability. The increase in tariffs to 50 per cent on many product lines represents an acute and sudden rise in the effective tax on Indian goods entering the U.S. market. For firms that export to the United States, the choices are stark: absorb the tariff and accept substantially smaller margins, pass the cost to U.S. buyers and risk losing market share, or attempt to reroute goods to alternative markets. Despite these challenges, Indian exporters have shown resilience and adaptability. For many small and medium-sized enterprises in India’s export ecosystem — particularly in textiles, leather goods, and other labour-intensive sectors — margins are thin, and access to alternatives is limited. Consequently, the ability to absorb tariff costs without layoffs or insolvency is constrained, but not impossible.
Several reputable analyses and market reports documented swift reactions in the weeks after the announcement. Exporters accelerated shipments to beat the tariff deadline where possible, and some segments reported order cancellations or re-pricing pressure as buyers shifted to suppliers not subject to such steep levies. Financial markets priced in the disruption: Indian equity indices experienced sectoral weakness, with particular pressure on pharmaceutical and export-oriented stocks when the pharma tariff news broke. Reuters reported that Indian pharma shares and broader indices slid on news of tariffs, reflecting investor concerns about revenue and profit exposure in the United States, where pharmaceuticals remain a key market for Indian producers. Currency markets also reacted: the rupee saw downside pressure against the dollar and required central bank intervention at times to stabilize volatility. These market moves are early indicators of contagion: tariffs affect expectations, which in turn condition capital flows, corporate financing costs, and investor risk premia.
At the sectoral level, the impact of the tariff war is not uniform. Labour-intensive sectors, such as apparel and footwear, are particularly vulnerable due to their significant exposure to the U.S. market. Gems and jewellery, where India is a global processing hub, also faced substantial tariff increases. The value chain in these sectors, characterised by many small players operating on thin margins, is at risk of rapid job losses and capacity contraction. In contrast, sectors where India competes on value-added, technology, or intellectual property are less directly affected by commodity tariffs but can suffer through second-order channels, including lower external demand, investor caution, and potential reductions in export orders.
Pharmaceuticals require special attention because India is a major global supplier of affordable generic medicines and APIs. The U.S. announcement of a 100 per cent tariff on branded and patented pharmaceuticals is aimed at protecting the domestic pharma industry and compelling foreign multinationals to invest in U.S. production. However, much of India’s exports to the U.S. are generics, which initial reporting suggested might not be directly targeted by the branded/patented tariff — the announcement substantially increased uncertainty and market risk. Policymakers, analysts and industry observers warned that any ambiguity in tariff scope or future expansion to complex generics or biosimilars could broaden the damage to one of India’s most valuable export sectors. The immediate stock market reaction — a sell-off in pharmaceutical equities — reflected both the probability of near-term disruptions to U.S. revenues and the longer-term risk of a policy that could gradually erode categories of India’s export strength.
Macroprudentially, a significant and prolonged hit to exports will depress manufacturing output, slow employment generation in export states, and reduce aggregate demand through income effects on workers and SMEs. Early economic commentary suggested possible modest downgrades to growth trajectories if tariffs persist; some macroeconomists forecast a measurable drag on GDP growth in the range of a few tenths of a percentage point, depending on the duration and scope of the tariffs, as well as the effectiveness of India’s mitigation measures. The potential for growth downgrades if the situation persists underscores the urgency of finding a resolution. The rupee’s weakness, while partly policy-driven, also reflects tighter external financing conditions that could make foreign debt servicing costlier for corporations and the sovereign. A depreciating currency can somewhat cushion exporters by lowering local currency costs, but it increases the burden of dollar-denominated liabilities and can accelerate inflation by making imports more expensive. Policy trade-offs therefore become acute: monetary easing to support growth risks exacerbating currency and inflation concerns, while tight monetary policy to defend the currency can deepen a downturn in the hit export sector.
India’s government response has been to mobilize targeted relief and to accelerate measures intended to diversify markets. Official announcements indicated the government planned and rolled out relief packages for exporters, including financial support, credit facilitation, and temporary subsidy schemes, to reduce immediate distress and prevent mass closures. These relief programs help in the short run but pose fiscal tradeoffs: the government must balance relief against fiscal consolidation priorities and long-term competitiveness measures, such as investing in quality upgrades, logistics, and technology. The effectiveness of assistance depends on speed, targeting accuracy, and whether the support helps firms pivot to alternative markets or product upgrades rather than perpetuate uncompetitive business models. The imposition of tariffs acts as a shock to supply chain location decisions and corporate strategy. Multinational firms, large exporters, and contract manufacturers must reassess their sourcing and routing strategies. Three strategic responses are typically employed: accelerating onshoring or nearshoring to the United States, diversifying markets to reduce U.S. exposure, or reengineering products and value chains to reduce tariff sensitivity.
The U.S. administration’s stated intent — particularly regarding the 100 per cent tariff on pharmaceuticals — is to incentivize onshore production of strategically important goods. For certain large multinationals, the calculus may favour building or expanding U.S. manufacturing capacity, but this option is capital-intensive and time-consuming. For Indian firms that sell primarily into the U.S. market, onshoring is not an immediate option unless they can partner with U.S. firms or relocate some production, and relocation is often constrained by capital, labour availability, and regulatory timelines. Diversification is a more feasible short-to-medium-term strategy: Indian exporters can attempt to reallocate shipments to alternative markets, such as the EU, the Middle East, Africa, and ASEAN countries. Indian authorities have identified dozens of potential alternative markets and have offered trade facilitation to help exporters find new buyers. However, shifting markets is no trivial task. Non-U.S. markets may have different standards, longer certification processes, entrenched competitors (e.g., Bangladesh and Vietnam in the textiles industry), and logistical challenges. Thus, while market diversification is a necessary tactic, it cannot eliminate the economic pain in the near term for goods where the U.S. is the primary or high-margin market. There is also a technological dimension: exporters can attempt to upgrade product value, shift to differentiated branded goods less sensitive to tariff arbitrage, or invest in certifications and manufacturing quality that open access to higher-value segments where price competition is less intense. Indian industrial policy and corporate strategy may therefore accelerate structural upgrading in affected sectors, raising long-term competitiveness but requiring capital, skills and time.
Defence, Strategic & Geopolitical Consequences
The tariff war extends beyond economics into strategy and geopolitics, as U.S.–India ties encompass defence cooperation, intelligence sharing, and a convergence of interests in the Indo-Pacific. The political economy of tariffs can bleed into perceptions of reliability and trust in strategic partnerships. Some strategic analysts argue that using tariffs as coercive leverage against a close security partner undermines long-term geopolitical goals: if economic coercion erodes trust, it may limit the scope for deeper cooperation on defence tech transfers, logistics sharing, or joint operations. Commentators in policy outlets have warned that alienating a rising power through heavy-handed economic measures risks spurring hedging behaviour and alignment with alternative power centres, which could be counterproductive to U.S. security objectives in Asia. These arguments assert that strategic interests are best preserved through stable and predictable economic relations, and that punitive tariffs can undermine this predictability. India faces a strategic squeeze in which Washington’s tariff pressure is partially linked to India’s energy choices, notably purchases of Russian oil. New Delhi’s sourcing decisions are shaped by energy security, price, and geopolitical calculations. While aligning with U.S. preferences might reduce trade friction, it may simultaneously reduce India’s bargaining room on energy and other strategic fronts. Suppose New Delhi perceives U.S. demands as an attempt to dictate its strategic choices. In that case, it may resist, doubling down on diversification that strengthens alternative ties, including with Russia and Middle Eastern suppliers. This dynamic illustrates how trade instruments can be used as geopolitical levers and how such leverage can produce unanticipated strategic realignments.
The tariff conflict could also accelerate India’s outreach to other partners. Indian diplomacy has actively sought alternative markets and investment partners, intensifying engagement with regions such as Africa, Latin America, Southeast Asia and the Gulf. Over the longer term, a sustained tariff dispute might strengthen India’s economic ties with other powers and multilateral groupings that provide alternative routes for trade and investment. While diversification reduces dependence on any single partner, it also reshapes geopolitical configurations in ways that may not be in the short-term interest of the imposing power. Defence and high-technology cooperation between the United States and India had been growing for years prior to the tariff dispute, encompassing arms sales, joint exercises, and technology transfer agreements. The tariff friction introduces a risk that political trust could erode, slowing or complicating future transfers of sensitive defence technologies and dual-use items. India, aware of such vulnerability, may pursue a twin-track approach of diversifying defence procurement and deepening indigenous capabilities. Accelerating indigenous defence production is consistent with India’s “self-reliance” policy but requires time and investment. In the near term, procurement pauses or hesitations by India in U.S. contracts could reduce the volume and tempo of bilateral defence business — a costly political signal on both sides.
On technology, tariffs are only one instrument; export controls, investment screening and non-tariff barriers constitute other levers that can be used to influence high-value, dual-use trade. If strategic mistrust hardens, both sides may deploy non-tariff restrictions more aggressively, creating fragmentation in standards, supply chains, and market access in cutting-edge sectors such as semiconductors, advanced materials, and critical life-science inputs. India’s reaction could be to deepen efforts at domestic capability building and to seek alternative suppliers from friendly partners, thereby increasing global supply-chain fragmentation. Over the long term, this can lead to parallel ecosystems that hinder integration and increase costs.
India’s immediate policy toolkit includes emergency relief for exporters, credit and liquidity support, targeted subsidies, tariff mitigation measures such as drawback schemes, and intensified trade diplomacy to open alternative export markets. These steps have been initiated to varying degrees; Indian officials have announced planned relief packages and diversification efforts in the market. Such measures help buy time and prevent systemic collapse in vulnerable industries. However, they also carry fiscal costs and may simply postpone necessary structural adjustments if not paired with reforms that raise productivity and product complexity in Indian manufacturing. A medium-term strategy should emphasize competitiveness upgrading, including investments in logistics, port efficiency, certifications, worker skills, technology adoption, and product differentiation. Policy measures that incentivize quality, branding, and R&D can help Indian firms move up the value chain and reduce their vulnerability to tariff arbitrage in basic commodities. Internationally, India can expand preferential trade agreements and market access initiatives, negotiate regulatory mutual recognition with blocs, and deepen trade facilitation efforts to accelerate market entry into alternative destinations. In terms of scenarios, a benign path would involve the U.S. tariffs being treated as temporary leverage, leading to a negotiated settlement in exchange for targeted policy moves or trade-opening measures by India, with limited long-term damage. A middle path would involve protracted tariffs, which India largely mitigates through diversification and upgrading, but with measurable near-term growth costs and political strain. A worst-case scenario would be persistent, growing tariffs and scope creep (e.g., the expansion of pharma tariffs to generics or biosimilars), causing structural export contraction, prolonged rupee weakness, and strategic drift between the countries, with knock-on implications for regional geopolitics.
Risk & Uncertainties
The imposition of sweeping tariffs by the United States under the Trump administration injects a profound layer of uncertainty into India’s economic and strategic calculus. At the heart of the issue is not only the immediate economic damage but also the unpredictability of policy trajectories. The Trump presidency has already demonstrated a willingness to use tariffs not merely as tools of economic protection but as instruments of leverage in a broader political and strategic sense. This creates a systemic risk environment where India cannot assume that tariff measures are temporary or limited to specific sectors. Instead, Indian policymakers must now prepare for a shifting baseline in which protectionism is embedded in the United States’ trade posture, with consequences that extend across industries and into the diplomatic sphere. One of the foremost risks stems from the volatility of U.S. policy itself. Unlike structural reforms or treaty commitments, tariffs imposed by executive decision can change with relative ease, subject to domestic political cycles, electoral considerations, and shifting alliances within the U.S. Congress. This means that for Indian businesses, the planning horizon is compromised. Pharmaceutical exporters—India’s flagship industry with nearly $25 billion worth of exports to the U.S. in 2024—must weigh the costs of building alternative market strategies against the possibility that tariffs could be rolled back within a few years. This creates a “policy whiplash” environment, where firms are forced into hedging strategies, reduced capital investments, or price increases that erode competitiveness. The risk profile also encompasses broader financial and macroeconomic vulnerabilities. Indian equity markets, which are heavily exposed to IT and pharmaceutical companies, have already displayed sharp volatility following tariff announcements. The depreciation of the Indian rupee in response to potential capital outflows further compounds uncertainties, as it raises import costs for energy and critical inputs. This introduces inflationary pressures into the domestic economy, forcing the Reserve Bank of India to strike a delicate balance between maintaining growth and containing inflation. Moreover, India’s sovereign credit ratings may come under pressure if global investors perceive a structural erosion in export revenues, particularly when paired with rising fiscal deficits linked to subsidies or support measures for affected industries.
Beyond the purely economic sphere, there is a risk of strategic misalignment. India’s deepening partnership with the U.S., particularly in defence procurement and Indo-Pacific security frameworks, is premised on mutual trust and shared objectives in countering Chinese assertiveness. Tariffs, however, risk injecting friction into this relationship by creating a perception of unilateralism and transnationalism in U.S. policy. India may become increasingly cautious about overcommitting to U.S.-led initiatives, instead seeking to preserve strategic autonomy by balancing its relations with Europe, Russia, and even China, where necessary. The tariff dispute thus has the potential to destabilize the political foundation of the India–U.S. partnership, raising long-term uncertainties about the reliability of the alliance. At the same time, the global dimension magnifies risks. Suppose other countries, especially within the European Union or East Asia, respond to U.S. protectionism by erecting their own trade barriers. In that case, India may find itself squeezed out of multiple markets simultaneously. Alternatively, these economies may seize the opportunity to strengthen their economic ties with the U.S. at India’s expense, further isolating Indian exporters. The cascading effect of protectionism can lead to a “race to the bottom,” where multilateral norms are weakened and global trade fragmentation accelerates.
This is where international institutions, such as the World Trade Organisation (WTO) and the G20, as well as emerging regional frameworks, become critical. In theory, India has recourse to the WTO’s dispute settlement system. Tariffs that violate Most Favoured Nation (MFN) principles or lack proper justification under national security exemptions can be challenged. However, the WTO’s dispute resolution mechanism has been significantly weakened in recent years, particularly due to the U.S. blocking appointments to the Appellate Body, effectively paralyzing the system. Even when disputes proceed, they are notoriously slow; on average, cases can take two to four years to reach a binding ruling. For a dynamic industry like pharmaceuticals, where pricing and patent cycles evolve rapidly, such delays render legal remedies less effective in mitigating immediate harm. Other international forums offer opportunities, but also pose limitations.
The G20, where India holds increasing influence, can serve as a platform to build consensus against protectionism. India’s presidency of the G20 in 2023 highlighted its capacity to shape discussions on resilient supply chains and equitable trade. However, such forums are primarily consultative and lack enforcement mechanisms. Similarly, the BRICS grouping, with its renewed expansion to include countries such as Saudi Arabia and Iran, presents India with an opportunity to forge coalitions advocating for multipolar economic governance. However, BRICS remains fragmented by divergent interests and does not currently possess binding economic mechanisms capable of countering U.S. tariffs. Another dimension of uncertainty is the response of multinational corporations and global investors. Large pharmaceutical and IT firms operating in India may accelerate their diversification strategies by relocating parts of their production or R&D to Southeast Asia, Eastern Europe, or Latin America, thereby hedging against tariff risks. While India remains attractive due to its skilled workforce and cost advantages, the perception of U.S. hostility toward Indian exports could weaken India’s ability to attract new investments. This poses a threat to long-term industrial upgrading, which is crucial for India’s ambition to transition from a service-dominated economy to a manufacturing powerhouse, as outlined in initiatives such as “Make in India” and “Atmanirbhar Bharat.” For India, navigating these risks requires a multi-layered approach. Diplomatic engagement with the U.S. remains paramount, particularly through mechanisms like the India–U.S. Trade Policy Forum, which can serve as a channel for negotiations and temporary relief measures. At the same time, India must strengthen its legal and institutional capacities to pursue WTO challenges more effectively, even if outcomes are uncertain. Diversification of trade partnerships—accelerating free trade agreements with the European Union, the United Kingdom, and the Gulf Cooperation Council—can also provide alternative markets and reduce overdependence on the U.S. Yet, uncertainty remains the defining feature. Tariffs are not isolated economic measures; they are embedded in the larger contestation over global economic governance. International institutions, although imperfect, remain important venues for norm-setting, coalition-building, and signalling. Their ability—or inability—to manage disputes, such as the current tariff war between the U.S. and India, will shape not only the bilateral relationship but also the future of the multilateral trading system. For India, the stakes are unusually high: failure to navigate this turbulent environment could jeopardize its growth trajectory, undermine strategic partnerships, and weaken its aspiration to become a central pillar of the global economy in the twenty-first century.
Conclusion
Trump’s tariff campaign against India in 2025 marks a sharp and consequential juncture in the bilateral relationship. Economically, it imposes immediate stress on exporters, financial markets, and potentially GDP growth, with particular vulnerability in labour-intensive and pharmaceutical sectors. Politically, it forces Indian policymakers to make difficult choices between short-term relief and long-term competitiveness, and the episode risks fueling protectionist sentiment domestically. Strategically, the tariffs constitute a test of the U.S.–India partnership: while defence and security cooperation may persist through shared regional interests, trust and long-term alignment could be weakened, prompting India to diversify partners and accelerate self-reliance in critical sectors. The domestic political implications of the tariff war are manifold. The sectors at risk employ millions of workers in politically pivotal states. Tariff-induced job losses or factory shutdowns could convert economic pain into electoral politics, increasing pressure on the federal government for rapid relief and on state governments for policy interventions. Indian political leaders and commentators have used nationalistic rhetoric to frame the event as an affront to Indian sovereignty and economic dignity, with the prime minister urging citizens to support domestic industry and reduce dependence on foreign products. This rhetorical framing helps build domestic consensus for countermeasures.
However, it also risks entrenching protectionism that could undermine India’s longer-term growth agenda if it translates into durable inward-looking policies. From a governance perspective, the tariff war stresses public finances and priorities. Relief packages and export incentives require fiscal room; if these measures are funded through higher borrowing or diverted from capital spending, the longer-term productivity growth story may be weakened. Conversely, if relief is tightly targeted and coupled to longer-term upgrading (for example, assistance conditional on digitalization or product upgrading), the policy response could mitigate near-term pain and strengthen future competitiveness. The judgment and administrative capacity to design such conditional, efficient programs will be a decisive factor in how much structural damage is avoided. Additionally, the tariff episode catalyzes debates within India about the balance between strategic autonomy and economic interdependence. Many analysts and policy elites fear that conceding strategically (for example, shifting away from certain energy suppliers) purely for tariff relief would set a precedent that undermines India’s policy independence. Thus, political calculus tilts toward resisting coercive external demands, even as policymakers seek pragmatic ways to protect exporters and maintain macroeconomic stability. The outcome will depend on whether the tariff measures are a temporary bargaining tactic or the start of a sustained policy posture; on the clarity and scope of the pharmaceutical tariff; on India’s skill at rapidly redirecting exports and upgrading competitiveness; and on how both governments trade off short-term political incentives against long-term strategic goals.
About the Author
John Peterson
Gayathri Pramod, a research scholar, works on the genealogy of governance over life and death in times of war, with a particular focus on the West Asian front. Her research interests centre on the thematic study of war crimes and other geopolitical flashpoints.
