Indian Economy Faces Risk from Tariff Uncertainty: Finance Ministry

Tariff Uncertainty Poses Key Risk to Indian Economy, Says Finance Ministry

In its latest economic review, India’s Finance Ministry has identified the uncertainty surrounding global trade tariffs—particularly the potential imposition of a 26% reciprocal tariff by the United States—as a significant external risk to the nation’s economic growth. While the Indian economy demonstrates resilience, bolstered by robust domestic fundamentals and proactive fiscal measures, the looming threat of renewed trade barriers underscores the need for strategic international negotiations and policy responses.

Understanding the Tariff Suspense

In April 2025, the U.S. announced a 26% reciprocal tariff on Indian imports, citing trade imbalances and market access concerns. Although a 90-day suspension was granted to facilitate bilateral negotiations, this pause is set to expire on July 9. The Finance Ministry’s April economic review emphasizes that the potential reinstatement of these tariffs constitutes a “key external vulnerability,” potentially disrupting India’s export-driven sectors and overall economic momentum.

Potential Economic Impacts

The imposition of the proposed U.S. tariffs could have far-reaching consequences for India’s economy:

• Export Decline: Sectors such as textiles, pharmaceuticals, and automotive components, which are heavily reliant on U.S. markets, may experience reduced demand.
• Investment Hesitation: Trade uncertainties can deter both domestic and foreign investors, leading to potential slowdowns in capital expenditure and industrial expansion.
• Supply Chain Disruptions: Increased tariffs may compel businesses to reconfigure supply chains, potentially increasing operational costs and affecting competitiveness.
• Macroeconomic Stability: Trade shocks can impact currency stability, inflation rates, and overall economic confidence.

Strategic Responses and Policy Measures

To mitigate these risks, the Indian government is undertaking several initiatives:

• Accelerated Trade Negotiations: India is actively engaging with the U.S. to finalize an interim trade agreement by June 25, aiming to prevent the reinstatement of the 26% tariffs.
• Export Incentives: The government plans to reinstate the Remission of Duties and Taxes on Exported Products (RoDTEP) scheme from June 1, providing tax refunds to exporters and enhancing global competitiveness.
• Diversification of Trade Partners: Efforts are underway to strengthen trade relations with other major economies, reducing over-reliance on any single market.
• Domestic Economic Stimulus: Continued focus on infrastructure development, manufacturing incentives, and consumption-driven growth aims to bolster the domestic economy against external shocks.

Conclusion

While the Indian economy remains robust, the uncertainty surrounding international trade tariffs, especially with key partners like the U.S., presents notable challenges. Proactive engagement in trade negotiations, coupled with supportive domestic policies, will be crucial in navigating these uncertainties and sustaining economic growth.