The Impact of US Reciprocal Tariffs on India’s Export-Driven Industries

Introduction

In the complex landscape of global trade, India’s manufacturing sector faces unprecedented challenges, particularly due to the reciprocal tariffs proposed by the United States. Despite initiatives like ‘Make in India’, the share of manufacturing in India’s GDP has stagnated, declining from 15.99% in 2014-15 to 15.83% in 2023-24. As the largest export partner, any shifts in US trade policy hold significant implications for India.

Understanding Reciprocal Tariffs

Reciprocal tariffs come into play when one nation, responding to another’s tariffs, imposes equivalent duties on that country’s goods. This tit-for-tat dynamic not only strains bilateral relations but threatens economic stability. Under Trump’s administration, the US implemented substantial tariffs across various sectors, impacting major Indian industries like steel, pharmaceuticals, textiles, and electronics.

Key Industries Affected

Steel and Aluminium

The steel and aluminium sectors have already felt the brunt of these policies, subjected to a 25% tariff. The following consequences have emerged:

• Declining Orders: Indian exporters face decreased demand in the US market.
• Job Cuts: Weaker order books lead to potential layoffs, particularly within steel plants and dependent industries.
• Downstream Effects: Higher metal costs strangle other sectors, notably automobiles and machinery.

Pharmaceuticals

As the world’s largest supplier of generic drugs, India’s pharmaceutical sector is under threat:

• Increased Costs: Rising tariffs inflate production expenses, reducing profit margins.
• Sourcing Shifts: US firms may seek alternatives in countries like China or Mexico, limiting India’s export capacity.
• Slowed Growth: The outlook for India’s pharma exports appears bleak as a result.

Textiles and Apparel

The textile industry’s predicament is equally dire:

• Competitiveness Issues: Rising export costs jeopardize India’s standing against competitors from Vietnam and Bangladesh.
• Loss of Orders: Lack of favorable trade agreements hampers market access.
• Employment Risks: Job losses loom large in critical textile hubs such as Gujarat and Tamil Nadu.

Electronics

India’s growing electronics manufacturing initiative may suffer due to:

• Discouraged Investments: Tariffs may prompt investors to reconsider India as a manufacturing base.
• Market Preferences: US companies are increasingly inclined to turn to manufacturing hubs like China and Vietnam.
• Disrupted Supply Chains: Key exports like smartphones and semiconductors stand to be heavily impacted.

Broader Economic Consequences

The ramifications of these tariffs extend into India’s domestic economy, presenting multi-faceted challenges.

Declining Export Revenues

A potential trade imbalance emerges as exports to the US wane, thereby reducing foreign exchange earnings and exerting pressure on India’s currency valuation.

Reduced Manufacturing Investments

Uncertainty generated by shifting trade policies undermines confidence in India’s export-oriented sectors. As Foreign Direct Investment (FDI) opportunities diminish, manufacturers may hesitate to invest in growth initiatives.

Employment Crisis

India’s manufacturing sectors are highly labor-intensive, employing millions. Job losses are a real and present danger, particularly in:

• Steel Plants: States like Odisha and Jharkhand face heavy layoffs.
• Textile Hubs: Major employment centers in Tamil Nadu and Gujarat are threatened.
• Pharma and Electronics: Facilities in Telangana and Bengaluru could see significant workforce reductions.

Strategic Measures for Resilience

Facing this turbulent environment, proactive policy measures could help India navigate these challenges:

Diversifying Trade Relationships

To counterbalance reliance on the US, strengthening trade relations with the European Union and expanding agreements with ASEAN nations could ensure broader market access. Exploring emerging markets in Africa and Latin America also offers potential avenues for growth.

Advancing Atmanirbhar Bharat

A focus on self-reliance should propel advancements in manufacturing practices. Increased investment in research and development is essential to keep pace with global technological demands. Subsidies targeted at domestic producers could help alleviate the burden of rising operational costs.

Fast-Tracking Trade Agreements

Expediting negotiations for Free Trade Agreements (FTAs) with the EU, UK, Australia, and Canada would provide new opportunities for sectors such as textiles, electronics, and pharmaceuticals.

Supporting Local Manufacturing

Government action to bolster local production through tax exemptions, lower interest rates for small and medium enterprises, and enhanced support for Micro, Small, and Medium Enterprises (MSMEs) can deliver vital assistance in this critical time.

Financial Relief Programs

Implementing financial measures, including subsidized credit and export incentive programs, would provide much-needed support to export-oriented businesses grappling with tariff challenges.

By adapting to these evolving dynamics, India can position itself to not only weather the storm but emerge as a resilient player in the global manufacturing landscape. The proactive measures discussed could enhance India’s competitiveness, balancing the challenges imposed by recent tariff policies while fostering sustainable growth.