Why lose sleep?

The West dislikes India’s growth because it undermines their global power, especially as their own influence declines. However, a strong and self-assured India is anathema to them; they can’t force it to do their bidding. Donald Trump is understandably frustrated by India’s refusal to meet his unreasonable demands. He made the UK, Japan, the EU, South Korea, and others agree to terms favouring America, which involved promises of large investments by them, unlikely to materialize.

Because of India’s principled stand against unrestricted free trade with the US, regardless of our genuine concerns and sensitivities, he was extremely annoyed and even called India’s economy dead. India’s mature response was only to remind that there are some red lines the government would never compromise.

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For Trump, Indian grapes have indeed turned sour, but Indians need not unnecessarily lose sleep over his 25 per cent tariffs on our goods, despite our neighbours (Bangladesh, Sri Lanka, Pakistan) and competitors (Vietnam, South Korea) having the advantage of much lower tariffs. The IMF has recently revised India’s growth forecast from 6.2 to 6.4 per cent for the current year. The worst-case scenario is a 0.2 to 0.3 percentage point reduction in GDP growth from Trump’s tariffs. It is to be remembered that India’s growth is driven primarily by domestic consumption rather than exports, and with inflation remaining well within targets and the monsoon progressing well, that consumption can only expand.

Domestic consumption accounted for 71.4 percent of our GDP in FY2024; exports comprised 21.2 per cent, and imports were 23.5 per cent, leading to a net GDP reduction of 2.3 per cent. Still, the export sector is significant ~ it provides employment for about 90 million individuals, including informal workers, and represents almost 12 per cent of overall employment. A majority are in labour intensive industries such as apparel (approximately 45 million), footwear, gems and jewellery, etc. During 2024-25, India exported goods valued at $438 billion against imports worth $721 billion, 17 per cent of which came from China alone.

Fifty one per cent of all exports went to nine countries, each with over $10 billion in imports. With $87 billion (20 per cent), the USA was number one; the UAE was a distant second, with $37 billion. The others were Netherlands, UK, China, Singapore, Saudi Arabia, Germany, and Bangladesh. Another $111 billion of exports went to 19 more countries, each of which bought $5-10 billion in Indian products. Without the USA, these nations represented 56 per cent of our exports. We already have trade agreements with most of these countries, like Australia, Bhutan, Japan, Malaysia, Mauritius, Singapore, South Korea, Sri Lanka, Thailand, and the UAE. India signed major FTAs this year with the UK and EFTA, a regional bloc that includes Iceland, Liechtenstein, Norway, and Switzerland.

India also has FTAs or Preferential Trade Agreements (PTAs) with several other regional blocks like APTA, ASEAN, SAFTA, and the MERCOSUR involving Brazil, Argentina, Uruguay, and Paraguay. It is currently negotiating with the EU and the GCC. These trade agreements will certainly boost our exports. Even though strict environmental limits in developed economies, like the EU’s carbon tax on steel and aluminium, will limit their scope, the pressing need is to diversify the product basket and explore new markets in East Africa, the Middle East, South East Asia, and Latin America. Trade agreements will facilitate this diversification, and these need to be fast-tracked and leveraged to substitute part of the losses arising from high US tariffs. Anyhow, we must reduce our dependence on an unpredictable USA.

Only a few commodities, such as engineering goods ($117 billion), electronic goods ($39 billion), textile and apparel ($35 billion), drugs and pharmaceuticals ($31 billion), gems and jewellery ($29 billion), smartphones ($24 billion) and rice and agricultural commodities ($24 billion), make up the bulk of our exports. Our largest exp – ort to the USA, engineering goods, account for only 14 per cent of our total export of engineering goods ($16 billion), followed by 24 per cent for textiles and apparels ($8 billion) 32 per cent for pharmaceutical products ($10 billion), 33 per cent for gems and jewellery ($10 billion) and 44 per cent for smartphones ($11 billion).

So, our product basket is not undiversified, and it doesn’t depend on a single country, but the USA is still our biggest trading partner, and its tariffs have drastically changed things, especially for the two sectors that employ the most. Gems and jewellery will now attract duties ranging from 30-38.5 per cent, up from the current rates of 5- 13.5 per cent, while Indian textile products which currently attract 6-9 per cent import tariffs in the USA will now see the effective rate soar to 31-34 per cent. Apparel will attract a 37 per cent tariff. If Trump imposes a further penalty, as he already threatened, for our continued purchase of Russian oil, this will further increase by an unspecified amount. Given that our major competitors in this area, Bangladesh and Vietnam, are facing lower tariffs than us, their products may displace Indian apparel from the US market.

However, international trade is complex and interwoven: Bangladesh and Vietnam import significant textile fibres from India, and decreased US demand may be offset by increased demand from these nations. The increase in tariffs on food and agriculture to 29-30 per cent from the current 14-15 per cent may also impact empl – oyment. Besides the blanket 25 per cent tariff, there are sector specific duties ~ 50 per cent on Indian steel or aluminium, and 25 per cent on auto and auto parts. These tariffs may cost us about $20-$30 billion in exports in the short run, but we can recover by adopting correct strategies for diversification of both products and markets.

Trump’s Executive Order exempts the tariffs on some manufactured goods important for India, like pha rmace uticals, copper, smart phones, and petroleum products, at least for now. India remained a critical supplier of generic drugs and APIs, and US tariffs didn’t target this sector because of high domestic de – p en dence. These items constitute about 30 per cent of India’s exports to the USA, for which the status quo continues, at least for now. Besides goods, services also earned $383 billion from exports during FY 2025, against imports of $194 billion, generating a trade surplus of $189 billion, against a deficit of $283 billion in goods trade.

About 70 per cent of our service exports pertained to the IT sector, including software development, support and maintenance, cloud infrastructure services, AI/ML and analytics, back-office processing, customer support, etc. Other important export-oriented sectors are business and management consultancy, financial, R&D and engineering services. The USA accounts for about 45 per cent of our service expo – rts ($175 billion), and the bulk of earnings ($110 billion) came from the IT sector alone, followed by other business services ($60 billion). Trump has so far focused only on manufacturing, and in any case, it will be impossible for the US to replace Indian IT services overnight, so we can assume the continuance of the status quo in respect of services.

But Trump is not just upsetting international trade ~ he is also redefining the American financial system by disrupting and replacing existing supply chains, aiming to turn the USA into a manufacturing superpower driven by technology, AI, and crypto-currencies. These are the challenges India must face. Reliance on the status quo would be too dangerous. We can take a cue from the past. During Trump’s first term, India faced higher tariffs on steel (25 per cent) and aluminium (10 per cent), leading to an immediate decline in their exports. But India successfully expanded exports to Europe and Southeast Asia by focusing on value-added engineering exports like auto parts, industrial machinery, etc.

Conversely, on textile and apparel, Trump imposed higher tariffs on China, which benefited Indian exports by diverting US orders, but it soon lost its competitiveness to Bangladesh and Vietnam because of higher input costs and poor logistics. We must not make the same mistake now. The lesson is obvious. They demand urgent reform that may cause short term pain for long-term benefits, and investment to scale up value addition by bringing in technology and AI.

We need to invest in precision engineering, green tech, and sophisticated electrical machinery, modernize textile clusters, provide energy subsidies, improve port access, and promote sectors like manmade fibre exports, where the global demand is rising. We can no longer afford to remain stuck in activities that add little value, like assembling imported components, and continue with archaic production methods. To assist exporters, we must find them new destinations, offer subsidies and incentives like cheaper credits, tax breaks, and GST removal for MSMEs, and PLI-like incentives for American firms in India. The bottom-line is that we must not succumb to Trump’s unreasonable demands.

As regards US defence products, we must never ever buy US armaments. The US is an unreliable and untrustworthy ally; we cannot depend on them in times of crisis like a war. Trump is now cozying up to Pakistan for his own commercial interests; he may even decide to supply F-35s to them. We must decouple from the USA in sectors critical to our survival. For now, we must just ignore Trump’s tantrums for what they are, strategies for deal-making to benefit America at our cost, but in case he attacks our service sector, we must retaliate with equal force. But all this must not distract us from the need for urgent, transformational reforms of our export sector to make our products globally competitive.

(The writer is a commentator, author and academic. Opinions expressed are personal)