India–US trade war: Sector-wise fallout and what’s next for Indian exports

New Delhi: The fragile architecture of global trade was dealt a fresh blow on July 31, 2025, when the United States, under President Donald Trump, announced a steep 25% reciprocal tariff on Indian goods. The new tariff, taking effect August 7, is not a standalone measure; it is accompanied by the threat of further penalties, specifically linked to India’s deepening crude oil and defence ties with Russia.

This, for India, is not just another chapter in its complex economic engagement with the world’s largest economy, it is an existential challenge to its export competitiveness, its economic growth trajectory, and its global trade ambitions.

A shock to the system: Tariffs as an economic weapon

The US tariff on India is higher than those imposed on Vietnam (20%), Indonesia (19%), and Japan (15%). It is only marginally lower than the 26% threatened earlier in April 2025, and higher than what many of India’s regional and global competitors now face.

This tariff bombshell has arrived at a time when India’s trade surplus with the US, a major source of growth, had grown to $41 billion in FY2025 from $21 billion a decade ago.

The move is widely seen as the sharpest protectionist recalibration by Washington since the early days of the Trump presidency.

According to ICRA’s comprehensive sectoral report, reviewed by NewsDrum, the potential economic impact is immediate: India’s GDP growth projection for FY2026 has been lowered from 6.2% to 6.0%, with a risk of further downward revision depending on the actual quantum of penalties levied due to India’s Russian linkages.

Tariff asymmetry: How India became the outlier in Trump’s trade map

In the new world of Trumpian tariffs, not all countries are equal. India now finds itself at a stark disadvantage compared to its Asian peers. Vietnam, Indonesia, and Bangladesh, India’s closest competitors in the export of textiles, garments, and certain engineering goods, face tariffs that are at least 5-6 percentage points lower. 

Even Japan, a major auto and electronics exporter, is subject to a tariff of just 15% on its shipments to the US.

A granular look at the White House’s tariff table shows that India’s rate is higher than the median, with only a few exceptions (notably China at 30% and certain African and Balkan nations at higher rates, but these are not India’s direct export competitors for most product categories).

The US-India tariff chasm becomes more acute because the US has clinched partial or sectoral deals with Vietnam, Indonesia, Japan, and the UK during a 90-day pause in April-July, securing improved access for US goods, and often, lower tariffs for its strategic partners.

India’s trade surplus and US dependency: The double-edged sword

The US accounted for a massive 20% of Indian merchandise exports in FY2025, a share that had climbed from 14% in FY2015, while its share in India’s imports has been steady at 5-7%. This resulted in a substantial and growing trade surplus, making the US not just a customer but the single largest market for Indian exporters.

Nearly every significant export-oriented sector, from pharmaceuticals to textiles, gems, chemicals, tyres, and auto parts, relies heavily on US demand.

Yet, this dependence has now become a vulnerability. ICRA’s data shows that for over 100 distinct product categories, the US’s share in Indian exports exceeds 5%.

For many niche segments such as handmade carpets (60% to the US), niger seeds (80%), and dairy products (38%), the American market is simply irreplaceable in the short term.

Sector-by-sector: The fallout

Textiles & apparel: The loom of discontent

If there is a single sector that will feel the full brunt of the US tariff offensive, it is textiles and apparel. The US absorbs a third of all Indian apparel exports and an astonishing 59% of home textiles. In cotton yarn, the share is much smaller (below 1%), insulating that sub-sector to a degree.

But for India’s vast garment and home textile industry, the 25% tariff is a body blow. Competitors, Vietnam, Bangladesh, and Indonesia, face 19-20% tariffs, giving them a 5-6 point cost advantage. With US retail demand still soft, the ability to pass on higher prices is limited. Margins for Indian exporters, already under strain from rising raw material and wage costs, will be compressed further.

ICRA’s sectoral breakdown predicts that supply chains will be disrupted, US buyers may shift orders to cheaper markets, and profit margins for Indian manufacturers will take a hit.

While the recently concluded India-UK trade agreement offers hope of market diversification, customer validation cycles in the West are long and unpredictable; the pain for the sector will be front-loaded, while gains from new markets could take years to materialize.

Auto components: Competitive edge under threat

Auto components are another sector caught in the crossfire. Nearly 30% of industry revenue is export-driven, and the US alone absorbs 27% of all auto component exports from India.

The new tariff not only raises costs for US-bound shipments but also weakens Indian suppliers’ price advantage compared to Japanese, Vietnamese, and Indonesian peers (each at 15-19%).

According to ICRA, about 8% of India’s auto-component output is directly exposed to the US tariff wall. Indian manufacturers are scrambling to diversify into new geographies and non-auto segments, while also pursuing cost-cutting and supply-chain renegotiations to cushion the blow.

However, with the USMCA (United States-Mexico-Canada Agreement) exempting Mexican and Canadian peers, Indian exporters face increased competitive pressures. The only partial silver lining is that China, at a 30% tariff, is even less competitive for now, though this is cold comfort given the scale of the hit to Indian shipments.

Tyres: Road to uncertainty

The Indian tyre industry is also bracing for turbulence. Tyre exports account for a quarter of total industry revenues, with the US market taking 17% of exports in FY2025. The segment is dominated by off-highway tyres, but the impact is broad-based across truck, bus, and passenger vehicle categories.

The 25% US tariff, compared to 19-20% for Vietnam, Indonesia, Thailand, and the Philippines, erodes the pricing power and volume prospects of Indian exporters.

The risk is not merely theoretical: replacement demand in the US market, a crucial driver for Indian off-highway and specialty tyres, is already showing signs of softening amid economic uncertainty.

ICRA believes the tariff impact will be negotiated with buyers on a case-by-case basis, depending on criticality and market share, but the overall trend is negative for both volumes and margins.

Chemicals & agrochemicals: Margins under pressure

The Indian chemical industry, especially dyes, pigments, and agrochemicals, counts the US as a key destination. For agrochemicals, 18% of exports go to America.

The differential now with EU exporters (who face a 15% tariff) has widened, even as the gap with China has narrowed to just 5%. This reduces India’s competitive advantage and could squeeze margins if US buyers look elsewhere.

ICRA notes that for dyes and pigments, the EU and Mexico (major suppliers alongside India and China) benefit from freight advantages and lower tariffs, raising the risk of Indian market share erosion.

For agrochemicals, US dependence on the EU remains high, but Indian exporters’ profitability is set to moderate as pricing pressure mounts.

Cut & polished diamonds (CPD): The shifting sands of trade

India dominates the global CPD market, handling 90% of all polishing. The US remains the top direct buyer, with 36% of CPD exports shipped to America in FY2025. Another 42% is routed through trading hubs like Hong Kong, UAE, and Israel, which often re-export to the US.

Here, the tariff asymmetry is dramatic. Direct Indian exports face a 25% tariff, while Belgium and Israel pay just 15%, and UAE only 10%.

Indian diamantaires are thus incentivized to reroute goods via these intermediaries, though the threat of US enforcement against such “trans-shipment” is real. Should the US clamp down on rerouted shipments, India’s $20 billion diamond export juggernaut could face a structural crisis.

Metals and non-ferrous metals: Collateral damage

Though the US is a small market for Indian steel (3% of exports) and aluminium (2%), the sector is vulnerable to indirect shocks. Tariff wars create gluts and supply displacement: for instance, Japanese and South Korean steel, previously bound for the US, may now flood the Indian market, depressing domestic prices.

In aluminium, China’s own domestic demand weakness and the global slowdown could drive down international prices, squeezing margins for Indian producers. ICRA sees the metals sector as a likely loser in any global growth slowdown stemming from reciprocal tariffs.

Pharmaceuticals: Exempt for now, but storm clouds gather

Pharma remains a rare bright spot. The US accounts for 37% of Indian pharma exports, and so far, these have been exempt from the tariff onslaught. But the relief may be temporary: the US administration is mulling new tariffs on pharmaceutical imports and is advocating for “most favoured nation” pricing rules to bridge the gap between American and global drug prices.

ICRA’s data shows steady revenue growth for Indian pharma firms in the US (9.9% YoY in FY2025), but regulatory and pricing risk remains a looming threat.

Petroleum products: Excluded, but the Russian shadow looms

Petroleum product exports to the US (6-8% of India’s total in recent years) are currently outside the tariff net. However, the sector is indirectly impacted by India’s shrinking savings from discounted Russian crude, a key irritant in the US-India relationship.

Following the Russia-Ukraine war, Russian crude’s share in India’s import basket surged from below 2% to 33-35% in FY2024-25. The average discount narrowed from 13-14% in FY2023-24 to just 7% in FY2025, shrinking India’s annual savings from $8.2 billion to $3.8 billion.

As these savings dry up and Western sanctions mount, Indian refiners face margin compression, and the sector’s resilience will be tested if further penalties are imposed.

Telecom instruments: Relative stability

Telecom instruments are an outlier: the US takes over 40% of Indian exports in this segment, but tariffs applied to competitors like Taiwan and Thailand are similar. The sector is expected to weather the tariff storm with minimal disruption.

Diversification and re-routing: The exporter’s dilemma

Indian exporters, faced with tariff headwinds in their biggest market, are already seeking workarounds. Diamond exporters are pivoting toward trade hubs in Belgium and UAE, hoping to re-route goods to the US with lower tariff exposure.

Auto component and tyre firms are seeking new footholds in the EU, UK, and Asia-Pacific, but market development cycles are slow and customer validation remains a challenge.

ICRA’s report notes that trade diversion away from India is a very real risk, as Vietnam, Indonesia, and Bangladesh step in to fill the void, aided by lower tariffs and increasing integration with US supply chains.

Global context: How do US deals with other countries compare?

The US has been active on the trade negotiation front, seeking deals that enhance access for American goods and secure new investments. Notably:

• EU: Now faces only 15% tariffs on most sectors (except metals), and has committed to $600 billion in new investments and $750 billion in US energy purchases.
• Japan: 15% tariff baseline, with Japan investing $550 billion in US industries including energy, semiconductors, and shipbuilding.
• Vietnam: 20% tariff, with tough rules against transshipment; full market access for US goods is part of the deal.
• UK: 10% reciprocal tariff on most goods, plus streamlined access for US aerospace and pharma sectors.

Compared to these agreements, India is at a clear disadvantage, both in terms of tariff levels and the absence of a sector-specific or overall bilateral deal.

The Russia factor: Crude discounts dry up, penalties loom

Much of the US rationale for singling out India on tariffs and penalties is India’s continued purchase of Russian crude and defence equipment. While discounted Russian oil once offered a huge competitive edge (with discounts of 13-14% over West Asian crude), by FY2025 that margin narrowed to 7%, and total savings fell sharply.

The share of Russian oil in India’s imports soared from 1.5% in 2018–22 to 33–35% by FY2024–25. But with Western sanctions tightening and the discount narrowing, India is squeezed between the US’s demands for alignment and its own need for affordable energy.

ICRA expects that without a reduction in Russian imports, further penalty tariffs could follow, compounding the export and growth challenge.

Impact on GDP and export growth: Projections and reality

ICRA’s projections are sobering. India’s merchandise export growth had already slowed to 0.1% in FY2025, after a contraction in FY2024. In the first half of 2025, exports to the US jumped by 25% (as exporters rushed to ship ahead of tariffs), but this is expected to reverse sharply from August onward.

The direct result is a lower GDP forecast for FY2026: 6.0%, down from 6.2%. If penalties related to Russia are severe, the downside could be even greater. Export-led sectors-textiles, engineering, chemicals-are likely to bear the brunt, while domestic demand will be hard-pressed to compensate for the loss of export momentum.

Sectoral table: US share in Indian exports by key category (FY2025)

Strategic and policy responses: What are Indian stakeholders doing?

The government is engaged in fast-track negotiations with the US for a more favourable deal, but progress remains slow. Industry associations are lobbying for sector-specific relief, pushing for the inclusion of Indian pharmaceuticals and IT services in the US’s next round of exemptions.

Exporters are pursuing diversification into new geographies, investing in brand repositioning for the EU, UK, and Asia-Pacific, and exploring higher value-addition in their supply chains. The pressure is mounting on policymakers to fast-track both Free Trade Agreements and domestic reform in logistics, regulatory compliance, and input cost management.

The geopolitical angle: India’s global trade tightrope

The US action against India must be seen in the context of wider global trade tensions: a US–China trade deal (with a baseline 10% tariff), the US–EU pact (15%), and the US–Vietnam agreement (20%). Each of these deals aims to lock in market access for American goods, reduce trade imbalances, and address strategic dependencies (on energy, defence, critical minerals, etc.).

For India, aligning more closely with the US would mean reducing Russian energy and defence ties, but this is not easily done without risking energy security and strategic autonomy. The country is thus caught in a delicate balancing act, with each decision under intense global scrutiny.

The new normal for India’s export machine

The imposition of a 25% tariff by the US, along with the spectre of additional penalties, marks a turning point for India’s export-led growth model. ICRA’s detailed sectoral analysis makes it clear: the risks are not abstract, they are immediate, sector-specific, and potentially systemic.

Unless a bilateral trade agreement is hammered out, India will see an erosion of market share in its largest export destination. Without urgent diversification, export recovery will be slow and patchy. The government’s policy choices in the coming months, on trade, Russia, energy, and domestic reform, will determine whether India can weather the storm or faces a period of sustained export underperformance.

For now, Indian exporters, policymakers, and investors must prepare for a turbulent, protectionist world, one where tariff walls are back, alliances are transactional, and global supply chains are in permanent flux. The next moves, in Washington and New Delhi, could define India’s economic future for years to come.