The Trump administration has reintroduced tariffs, imposing a 10% tariff on all imports from China and a 25% tariff on steel and aluminum. Meanwhile, 25% tariffs on imports from Mexico and Canada were on hold until the end of February. Additionally, reciprocal tariffs are planned to equalize tariff rates across trading partners. While implementation details remain uncertain, it is clear that higher tariffs are back. Unlike the phased tariff rollout of 2018-19, the current tariffs apply to both capital goods and consumer goods simultaneously. Additionally, the focus on trade in autos and durable goods means that the economic impact may be more immediate and pronounced.

This article examines the potential economic impact of these tariffs on inflation, consumer spending, and GDP growth. Drawing insights from the 2018-19 tariff episode, we evaluate how past tariff measures influenced economic conditions and what that history suggests for the present situation. The key question now is not whether reciprocal tariffs will be imposed but how and when they will take effect.

Tariff Changes Over The Years Between India & US

Over the years, both India and the US have modified their tariff structures to align with changing trade policies and economic priorities. While US tariffs on Indian exports have remained relatively stable, India's tariff adjustments have been more dynamic. The US tariff rate on Indian goods saw a gradual increase from 2.72% in 2018 to 3.91% in 2021 before slightly declining to 3.83% in 2022. In contrast, India's tariffs on US imports have shown a more pronounced upward trend, rising from 11.59% in 2018 to 15.30% in 2022.

These shifts reflect the broader trade strategies of both nations, with India leveraging tariffs as a tool for economic protection and revenue generation, while the US has maintained a relatively steady approach with moderate fluctuations. The US remains a top export destination for Indian goods & services in FY24, accounting for 17.7% of total exports.

In FY24, India's top-20 exports to the U.S., including diamonds, petroleum, smartphones, jewelry, and semiconductor components, accounted for approximately 57% of total exports to the country. These exports currently face a weighted average tariff of just 1.9%. However, under a proposed uniform tariff of 9.5%, the weighted average tariff would increase to 7.6%, marking a 5.9 percentage point rise.

Possible Tariff Implementation Approaches For US Against India

The US has two primary options for imposing tariffs on Indian goods:

1. Uniform Tariff Across All Products: One approach would be to impose a flat tariff rate on all Indian imports, similar to what was done with Mexico and Canada, where the US imposed a 25% tariff across the board. If the US follows this precedent with India, we could see an increase in weighted average tariffs by approximately 7% to equalize the current 10%-3% disparity.

2. Product-Specific Tariffs: A more likely approach is the imposition of tariffs on specific products where the trade imbalance is most pronounced. The ‘Fair & Reciprocal Plan’ mandates the Department of Commerce to assess trade barriers imposed by partner countries and submit a report by April 2025. Following this, other agencies will conduct further investigations over 180 days. Given this timeline, product-specific tariffs could be introduced gradually, targeting sectors where India’s tariffs are highest.

Product-Specific Tariffs: Targeting Key Indian Exports

If the US proceeds with reciprocal tariffs, India’s export sector could face severe consequences. A blanket tariff increase on all Indian exports would increase costs and make Indian products less competitive in the American market. The situation would be even more concerning if the US implements product-specific tariffs, as many of India's top 10 export categories — including labor-intensive sectors such as jewelry and marine products — already face tariffs of 10% or higher. The possibility of further tariff hikes could reduce India's market share in the US and push Indian exporters toward alternative markets.

Likelihood of Reciprocal Tariffs From India To US

The imposition of reciprocal tariffs on Indian exports now appears to be a matter of timing rather than speculation. On February 13, 2025, the US President signed the ‘Fair & Reciprocal Plan,’ a memorandum directing government agencies to formulate a strategy for restoring fairness in US trade relationships.

According to the memorandum, US exporters face higher tariffs in many countries, with India among those specifically called out for its agricultural tariffs (averaging 39%) and steep two-wheeler tariffs (100%). The memorandum's fact sheet highlights that US goods are subject to higher tariffs in nearly 400,000 product categories across 132 countries. With the US having successfully used tariffs against China since 2018 to reduce the trade deficit from $420 billion in 2018 to $295 billion in 2024, the effectiveness of such policies is well-documented.

Sectoral Impact of Reciprocal Tariffs

Analysts predict that the sectors most vulnerable to increased tariffs include pharmaceuticals, auto components, and electronics. However, the impact on chemicals, automobiles, metals, and industrial goods is expected to be relatively limited. This differentiation suggests that targeted tariffs, rather than uniform ones, may be the more likely route the US will take. The most impacted sectors include:

• Auto Components: U.S. government announced a new tariff plan for automobiles, to take effect from April 2, 2025, with a base tariff of 25%. Higher tariffs (potentially exceeding 25%) are also planned for imported semiconductors and pharmaceuticals. While India is not a significant exporter of automobiles to the U.S., auto components remain a major contributor to its export portfolio. Tariff increases of 13% would impact a sector that contributes over $2 billion to India's exports.

• Pharmaceuticals: India is a critical player in the global pharmaceutical industry, and the U.S. is its largest market, accounting for nearly 31% of total exports. Indian pharmaceutical companies supply 47% of all generic prescriptions in the U.S. and contribute 15% of global biosimilar volumes. In CY22 alone, Indian pharmaceutical exports helped save the U.S. healthcare system an estimated $408 billion. While this delay would affect all pharmaceutical exporters, it could disproportionately impact Indian firms due to their high exposure to the U.S. market.

• Semiconductor Tariffs and India's PV Cell Industry: India is not a major semiconductor exporter, but the U.S. remains the largest market for India’s nascent semiconductor and photovoltaic (PV) cell industry, accounting for 90% of its semiconductor exports. PV cells, which convert sunlight into electricity, have been among the fastest-growing export categories, with a tenfold increase in the last five years. India has benefited from U.S. tariffs on Chinese solar products, but if new tariffs extend to India, this advantage could be eroded, threatening a key growth sector.

• Diamonds: Sector is likely to see tariff hikes of 10%, affecting its competitiveness in the U.S. market.

• Agriculture and Marine Products: With India imposing an average tariff of 38% on U.S. agricultural imports while the U.S. imposes just 5.2% on Indian goods, this sector is highly vulnerable to retaliatory tariffs.

• Smartphones: A proposed tariff increase of 20% could disrupt India’s growing role in global smartphone manufacturing.

• Jewelry: A 19% tariff hike could substantially impact India’s thriving jewelry export sector.

India’s Strategic Response: Buying Time and Reducing Tariffs

Unlike in 2019, when India retaliated with tariffs after losing its Generalized System of Preferences (GSP) status, the Indian government has adopted a more cautious approach this time. Since the recent budget announcements, India has proactively reduced tariffs on several U.S. imports in an effort to ease tensions and maintain trade relations.

Further tariff reductions will likely be expected. India has also established a high-level committee to review tariff reliefs, with a report due by March 15, 2025—just two weeks before the U.S. agencies are set to submit their preliminary report on trade practices in multiple countries, including India.

Beyond Tariffs: VAT and GST Under Scrutiny

Additionally, the US does not solely view custom duties as trade barriers. Indirect taxes like VAT, GST have also been labeled as tools that limit market access. Given that India has one of the highest consumption tax rates among emerging markets, its tax system may attract further scrutiny from U.S. trade regulators. This broader interpretation of trade restrictions could lead to a wider set of trade barriers being imposed on Indian exports.

Economic Impact of Tariffs in US & The World

Much of the transmission channel for these effects runs through durable goods, particularly given the significance of trade in automobiles between the US, Mexico, and Canada. However, several factors contribute to uncertainty in these projections, including the appreciation of the US dollar, pass-through rates to consumers, secondary inflationary effects, and general economic uncertainty.

Lessons from the 2018-19 Tariff Episode

The trade war of 2018-19 provides a valuable reference point for understanding the likely effects of the current tariffs. Key takeaways from that period include:

1. Inflationary Effects Come First: The 2018-19 tariffs initially led to higher prices before negatively affecting economic activity. However, the inflation impulse was relatively short-lived, partly due to the different inflation dynamics of the time.

2. Consumer Demand Declines: As seen in 2018-19, consumers respond to higher prices by reducing purchases of tariffed goods. This trend is likely to repeat, particularly given the elasticity of demand for many affected products.

3. Manufacturing and Employment Suffer: The previous round of tariffs resulted in declines in manufacturing employment and production. This time, the negative effects on economic activity could materialize faster due to:

• A broader range of targeted countries,

• Limited exemptions,

• Pre-adjusted trade flows since 2018,

• Increased trade policy uncertainty.

Relationship Between Tariffs and Inflation

Between 2018 and 2019, as tariffs were imposed, the Fed’s stance shifted from a gradual rate increase to a policy rate easing, largely due to the effects of trade policy uncertainty on economic growth. Research on the 2018-19 tariffs suggests that higher import tariffs led to an increase in both producer and consumer prices. However, the extent of this pass-through varied by sector and over time. While consumer prices saw an immediate rise in response to the tariffs, empirical evidence indicates that the impact on the inflation rate was not sustained.

Despite rate cuts, as of now major central banks continue to scale down their balance sheets in an effort to contain inflation. The Federal Reserve's balance sheet contracted to $6.8 trillion in February 2025, down from its peak of $8.9 trillion in April 2022. Similarly, the ECB's assets decreased from $9.8 trillion in December 2021 to $6.6 trillion in early 2025. This ongoing balance sheet reduction reflects a broader strategy by central banks to ensure long-term economic stability while managing inflationary pressures.

Sectoral Price Shocks

The initial tariffs were imposed on steel and aluminum products. Despite the relatively limited scope of these tariffs, producer price indices (PPIs) for different metals showed an uptick.

Research suggests that producer prices in the US increased by approximately the same magnitude as import tariffs. This finding highlights the relatively quick pass-through of tariffs into final goods prices, with most adjustments occurring within a few months. However, the level effect varied across different goods categories. For instance, in sectors like furniture and major appliances, there was a clear shift in price levels, even as inflation growth stabilized. In contrast, sectors such as electronics and sporting goods experienced an immediate price level increase, but the levels eventually reverted.

The varying sectoral impacts of tariffs can be attributed to multiple factors, including:

• Pricing power of retailers and manufacturers: Companies with greater control over pricing had the ability to pass on costs more effectively.

• Exemptions in specific sectors: Some industries, particularly electronics, benefited from tariff exemptions, reducing their overall exposure.

• Adaptability of supply chains: Producers who swiftly reoriented their supply chains were able to mitigate some tariff-induced price pressures.

Global Growth Clouded by Trump’s Policy Actions

IMF projects that global economic growth will trend below historical averages, remaining in the range of 3.1% to 3.3% from 2025 to 2029. This is notably weaker than the average 3.7% growth observed between 2000 and 2019. Additionally, inflation is expected to remain elevated at 4.3% in 2025 before gradually declining to 3.6% in 2026 and 3.2% by 2029.

Among emerging economies, India is projected to remain a bright spot, with robust domestic economic activity supporting a steady growth rate of 6.5% over the forecast period. RBI has already commenced its rate-cut cycle, which should further bolster economic resilience. In contrast, China's economic growth is expected to decelerate, falling to 4.5% in 2025 and further softening to 3.3% by 2029. The imposition of higher tariffs by the Trump administration is anticipated to exert additional downward pressure on China's economic performance.

Global Equities: Developed Markets Outperform, EMs Lag

Developed markets (DMs) continued their strong run in 2024, gaining 16% and reaching all-time highs. In contrast, emerging markets (EMs) remained 19% below their February 2021 peak, despite a positive 10% return in 2024, primarily led by Taiwan and China.

While FYTD25 returns for DM and EM indices have narrowed to around 9-10%, foreign portfolio investors (FPIs) have consistently favored DMs over EMs. Over the last seven months of 2024, the US alone received net inflows of $443 billion, while most EMs experienced outflows.

FPI Flows: Heavy Outflows from India, Mixed Trends in China, Struggles Elsewhere

• India: FPIs have been net sellers since September 2024, with cumulative outflows of $25.6 billion.

• China: While total FPI inflows stood at just $9.6 billion in 2024, September alone saw a massive $96.4 billion inflow during the market recovery.

• Taiwan: Net FPI outflows of $91.6 billion over the past five years, including a sharp $29.5 billion withdrawal since March 2024.

• Brazil: $6.7 billion outflows from January to November 2024, but a $2 billion inflow followed until February 2025.

• South Korea: Began witnessing outflows from August 2024, now totaling $19.8 billion.

• Indonesia and Malaysia: Saw selloffs starting in October 2024, with outflows of $3.4 billion and $2.9 billion, respectively.

• South Africa and Thailand: Continued gradual outflows, losing $10.7 billion and $4.7 billion, respectively, since the beginning of 2024.

Outlook for India & Nifty Earnings Outlook: Gradual Recovery Ahead

Macroeconomic landscape for FY26 remains largely stable despite global uncertainties. India’s GVA growth is projected at 6.6% for FY26, slightly higher than the 6.4% recorded in FY25. Looking ahead to FY27, growth is expected to rise to 7.0%, assuming a stable global economic environment and a recovery in trade activity.

• Agriculture: Expected to normalize to 3.5% growth, contingent on normal monsoon conditions. Predictions from global institutions indicate that La Niña will subside by 2025, likely ensuring stable rural incomes and demand.

• Industry: Anticipated to grow at 6.6% in FY26, buoyed by expansion in manufacturing and government-backed Production-Linked Incentive (PLI) schemes. However, the impact of global trade restrictions on exports remains a key risk.

• Services: Expected to maintain steady growth at 7.4% in FY26, similar to FY25, with major contributions from construction, financial services, and public administration.

• Inflation: Expected to remain manageable but slightly above the 4% target. With the US Federal Reserve likely to slow its rate-cut cycle, India is expected to experience a shallow rate-cut cycle in FY26.

• Key sectors contributing to this recovery include financials, auto, oil & gas, and IT. Notably, telecom and industrials are set to post robust earnings growth of 36% and 27%, respectively, in FY26. Meanwhile, auto , metals, and cement should see a strong rebound after a tepid FY25. However, financials and power are expected to lag. Looking ahead to FY27, cement, telecom, industrials, and auto are likely to see the highest earnings growth, whereas the pharma sector may face an earnings contraction.

Earnings growth for Indian equities appears to have bottomed out in FY25, with a modest 5% EPS growth expected. However, a stronger recovery is anticipated in FY26 and FY27, driven by key sectors. Nifty EPS estimates stand at a growth trajectory of 5%, 14% & 13% for FY25, 26 & 27.

Conclusion: Navigating the New Trade Landscape

The potential imposition of U.S. reciprocal tariffs represents a major challenge for India’s trade strategy. Whether through uniform or product-specific tariffs, the impact on key sectors like pharmaceuticals, auto components, semiconductors, and jewelry could be substantial. With additional concerns surrounding VAT, GST, and non-tariff barriers, India must prepare for a complex and evolving trade relationship with its largest export market.

India's cautious approach—reducing tariffs on select goods while maintaining dialogue with the U.S.—may buy some time, but further negotiations will be crucial to mitigating the impact of the proposed tariffs. As both nations navigate these trade tensions, India will need to balance protectionist policies with the need to maintain a strong and sustainable export economy.

The return of tariffs will likely have significant economic implications, with inflation rising before economic activity slows. The 2018-19 trade war provides crucial insights, suggesting that consumer demand will decline, manufacturing may suffer, and the Federal Reserve’s policy response will be closely tied to economic performance. Given these factors, businesses and policymakers should prepare for potential disruptions and economic volatility in the coming months.