Trump’s 50% Tariff on India Kicks In affecting Textiles
US tariffs of 50% on Indian goods took effect on Wednesday as Donald Trump sought to punish Delhi for buying Russian oil and weapons. The measures – among the highest in the world – include a 25% penalty on transactions with Russia, seen as a key source of funding for its war in Ukraine.
India, a vital US partner in the Indo-Pacific, has shown no signs of halting purchases, calling the tariffs unfair and vowing to choose the “best deal” on oil to protect its 1.4 billion people.
But concerns are mounting that exports and growth in the world’s fifth-largest economy could be hit hard. The US, until recently India’s largest trading partner, has now triggered a tariff shock that has sent the Indian government into firefighting mode.
Earlier this month, Prime Minister Narendra Modi promised tax cuts to offset the blow, warning that the tariffs could disrupt millions of livelihoods in India’s export-driven industries supplying everything from clothes to diamonds and shrimp to American consumers.
He pledged a Diwali gift in the form of a “massive tax bonanza” for ordinary citizens and the small businesses that power Asia’s third-largest economy.
Wearing a bright saffron turban and addressing crowds from the ramparts of Delhi’s Red Fort during Independence Day celebrations, Modi urged small shop owners and traders to display signs of “Swadeshi” or “Made in India.”
“We should become self-reliant – not out of desperation, but out of pride,” he said. “Economic selfishness is on the rise globally and we mustn’t sit and cry about our difficulties, we must rise above and not allow others to hold us in their clutches.”
Modi has since repeated the message in multiple speeches this week, telling citizens to both make in India and spend in India. Yet the former remains difficult: manufacturing’s share of India’s GDP has stagnated at about 15%, despite subsidies and production incentives.
Economists say that immediate tax relief could cushion the impact. After a $12bn income tax cut earlier this year, Modi is now eyeing an overhaul of the goods and services tax (GST) to simplify and lower rates.
Introduced eight years ago to replace a maze of indirect taxes, GST has become overly complex with multiple thresholds and exemptions. Experts have long called for reform.
Private consumption, which makes up nearly 60% of India’s GDP, has slowed in cities due to job cuts and lower wages, even as rural spending remains strong thanks to a bumper harvest. Tax cuts, or what Modi calls a “fiscal stimulus,” could revive demand.
Morgan Stanley said the measures should support consumption, boost GDP, and ease inflation. “This is particularly crucial amid headwinds from ongoing global geopolitical tensions and adverse global tariff-related developments that might impair external demand,” the firm noted.
Consumer-facing sectors – scooters, small cars, garments, and even cement – are expected to benefit most, with demand traditionally spiking around Diwali.
Though the exact tax structure is not yet known, analysts believe revenue losses from lower GST would be offset by higher tax collections and bigger-than-expected dividends from India’s central bank. UBS argues the cuts will have a larger “multiplier effect” than previous corporate and income tax breaks, as they “directly affect consumption at the point of purchase, potentially leading to higher consumer spending.”
The tax moves could also push India’s central bank toward another interest rate cut, after already lowering rates by 1% in recent months. That, combined with an upcoming boost in salaries for nearly five million government employees and 6.8 million pensioners, should help sustain growth momentum, economists say.
Meanwhile, the war of words between Delhi and Washington has escalated. Trade talks that were to begin this week have been called off, as tariffs at 50% amount to what experts describe as a de facto sanction on trade between the world’s biggest and fastest-growing economies – a scenario unthinkable just months ago.
Source: BBSB