US Tariffs on India 2025: Impact Analysis from Economic Survey 2025-26
The imposition of tariffs by the United States on Indian goods in 2025 represents one of the most significant trade policy developments affecting the Indian economy in recent times. The Economic Survey 2025-26 provides a detailed analysis of these tariffs, their immediate impact, and India's response. For UPSC aspirants studying international trade and India's external sector, this topic assumes critical importance given its ongoing relevance to current affairs and economic policy discussions.
Timeline of US Tariff Impositions on India in 2025
According to the Economic Survey 2025-26, the United States announced two rounds of tariffs on Indian goods during 2025. The first set of tariffs, described as "reciprocal tariffs," was announced by the President of the United States in April 2025. These tariffs imposed a 25 per cent additional duty on imports from India.
The term "reciprocal tariffs" was used to justify these measures on grounds that India maintains higher tariff rates on American goods than the US imposes on Indian goods. The US administration argued that these tariffs were necessary to address what it perceived as an imbalance in trade relations.
Initially, there was widespread expectation that India would negotiate an early agreement with the US administration to lower or eliminate these tariffs. Many trade analysts believed that India would be one of the early winners in striking a deal, given the strategic importance of India-US relations.
However, the situation took a surprising turn in August 2025. The American President announced an additional penal tariff of 25 per cent on most of India's merchandise exports to the United States. This additional tariff was imposed on top of the reciprocal tariff of 25 per cent announced in April. Effectively, Indian goods now faced a combined tariff burden of up to 50 per cent when entering the American market.
Why the August Tariff Announcement Surprised Markets
The Economic Survey 2025-26 notes that the August announcement "surprised many since India was expected to be one of the early winners in the new tariff regime of the United States." This surprise had several dimensions.
First, India-US relations had been on an upward trajectory in recent years, with growing strategic cooperation in areas ranging from defence to technology. The imposition of punitive tariffs seemed at odds with this broader relationship trajectory.
Second, negotiations were believed to be progressing positively. Reports had suggested that India was willing to make concessions on market access for American products in exchange for tariff relief. The additional penal tariff suggested either a breakdown in negotiations or a shift in US priorities.
Third, the severity of the combined tariff – effectively up to 50 per cent on many goods – was higher than many had anticipated. This level of tariff can make Indian exports uncompetitive in the American market for price-sensitive product categories.
The immediate market reaction was a downward revision of growth forecasts. Analysts factored in the potential loss of export revenue and the dampening effect on investment sentiment. The rupee also came under pressure as concerns about the trade impact weighed on currency markets.
India's Response: Structural Reforms and Policy Dynamism
The Economic Survey 2025-26 highlights a remarkable aspect of India's response to the tariff shock. Rather than seeking immediate retaliatory measures or aggressive trade actions, the government focused on accelerating domestic reforms to strengthen the economy's competitiveness and resilience.
The survey notes: "Growth forecasts were revised downward. But in reality, growth accelerated due to a slew of structural reforms and policy measures."
Among the key reforms implemented during this period:
GST Overhaul: The government passed the most radical overhaul of the Goods and Services Tax since its inception in 2017. This reform aimed to simplify the tax structure, improve compliance, and reduce the cost of doing business for Indian manufacturers.
Nuclear Power to Private Sector: Budget announcements on opening up nuclear power generation to the private sector were implemented. This move aimed to address India's long-term energy security needs and reduce energy costs for industry.
Insurance Sector Opening: The insurance sector was opened to 100 per cent foreign direct investment, enhancing the flow of long-term capital into the Indian economy.
Labour Codes Notification: The four labour codes were notified, with rules expected to be in place in the next few months. These codes consolidate and simplify dozens of labour laws, making it easier for businesses to comply with regulations while protecting workers' rights.
Environmental Reforms: The Ministry of Environment and Forests relaxed green cover norms for industries based on their polluting potential, moving away from a uniform 33 per cent mandate. This reform reduced compliance costs for cleaner industries.
Quality Control Orders Review: Indiscriminate Quality Control Orders, which had adversely affected downstream industries, were put on hold. This allowed industries to access inputs without facing artificial supply constraints.
The cumulative effect of these reforms was to inject "a sense of dynamism" into governance, as the survey describes it. By the end of the year, India was anticipating a full-year real growth rate of over 7 per cent, confounding the pessimistic forecasts made after the tariff announcements.
Impact on Indian Exports and Trade Balance
The United States has traditionally been one of India's largest export destinations, particularly for goods such as pharmaceuticals, textiles and apparel, gems and jewellery, engineering goods, and agricultural products. The imposition of high tariffs affects the competitiveness of Indian exports in these categories.
The Economic Survey 2025-26 acknowledges that export growth has shown some softening. Trade data for Q3 of FY26 indicate that core goods exports expanded by 3.5 per cent and services exports by 1.4 per cent on a year-over-year basis. While still positive, this represents a moderation from earlier growth rates, partly attributed to the tariff impact and a high base effect from the previous year.
However, the survey also notes that export momentum is expected to strengthen, supported by several factors. India has been actively diversifying its export markets. The recently concluded free trade agreement with the European Union opens new opportunities for labour-intensive manufactured exports. Trade agreements with other partners are also being pursued to reduce dependence on any single market.
Additionally, the rupee's depreciation during 2025 has provided some offset to the tariff impact. A weaker rupee makes Indian goods more competitive in dollar terms, partially compensating for the additional tariff burden. The survey notes: "It does not hurt to have an undervalued rupee in these times, as it offsets to some extent the impact of higher American tariffs on Indian goods."
Strategic Implications: From Dependence to Resilience
The Economic Survey 2025-26 situates the US tariff episode within a broader discussion of India's strategic economic positioning. The survey argues that the global trading system has fundamentally changed, with "trade policy now shaped primarily by security and political considerations rather than efficiency or multilateral rules."
In this context, the tariff episode reinforces the importance of building "strategic resilience." The survey emphasizes that India must reduce its dependence on any single market or trading partner. This involves not just diversifying export destinations but also developing domestic capabilities to produce goods that were previously imported.
The concept of "geostrategic globalisation" introduced in the survey is relevant here. Unlike the earlier era of "hyper-globalisation" where efficiency and cost were the primary drivers of trade, the current era sees countries prioritising strategic considerations, friend-shoring, and supply chain security. India must adapt to this new reality by building alliances and trade partnerships that are resilient to political shocks.
The survey also highlights the importance of manufacturing competitiveness. Countries with strong manufacturing export bases have historically enjoyed more stable currencies and greater economic leverage in trade negotiations. India's push to develop manufacturing through PLI schemes and other initiatives takes on added importance in this context.
Three Global Scenarios and India's Position
The Economic Survey 2025-26 presents three scenarios for the global economy, all of which are relevant to understanding the tariff situation's trajectory.
In the first scenario (40-45% probability), the current "business as usual but fragile" situation continues. Trade frictions persist but do not escalate dramatically. India manages these frictions through bilateral engagement and economic resilience.
In the second scenario (40-45% probability), a "disorderly multipolar breakdown" occurs where strategic rivalry intensifies and trade becomes explicitly coercive. In this scenario, the US tariffs would be part of a broader pattern of trade weaponisation affecting multiple countries.
In the third scenario (10-20% probability), a "systemic shock cascade" unfolds where financial, technological, and geopolitical stresses amplify each other. This could involve a severe global recession that affects both trade volumes and the willingness of countries to engage in trade conflicts.
In all three scenarios, the survey notes that "India is relatively better off than most other countries due to its strong macroeconomic fundamentals." India's large domestic market, adequate foreign exchange reserves, and strategic autonomy provide buffers against trade shocks.
Lessons for Indian Policymakers
The US tariff episode offers several lessons for Indian policymakers, which the Economic Survey 2025-26 articulates implicitly and explicitly.
Reform is the Best Response: Rather than engaging in tit-for-tat trade retaliation, India's focus on accelerating domestic reforms proved effective. This approach strengthened the economy's competitiveness and sent a positive signal to investors.
Diversification is Essential: Over-reliance on any single export market creates vulnerability. Actively pursuing trade agreements with multiple partners (EU, UK, GCC, etc.) reduces this vulnerability.
Manufacturing Competitiveness Matters: Countries with strong manufacturing bases have greater trade leverage. India must continue efforts to boost manufacturing through conducive policies.
Strategic Autonomy has Economic Value: India's ability to maintain strategic autonomy – not being overly dependent on any power bloc – provides flexibility in navigating trade tensions.
Currency Flexibility Provides Buffer: The rupee's depreciation provided some offset to tariff impacts, highlighting the value of exchange rate flexibility in absorbing external shocks.
UPSC Relevance: US Tariffs and India's External Sector
For UPSC examinations, this topic is highly relevant for both Prelims and Mains. Key aspects to understand include:
- The chronology and nature of US tariff impositions on India
- India's policy response emphasizing domestic reforms
- The concept of reciprocal tariffs and their justification
- Impact on India's export competitiveness and trade balance
- The broader context of changing global trade dynamics
- India's strategy of market diversification and manufacturing promotion
Practice MCQs on US Tariffs on India - Economic Survey 2025-26
Q1. According to Economic Survey 2025-26, the US announced reciprocal tariffs of what percentage on India in April 2025?
(a) 10 per cent
(b) 15 per cent
(c) 25 per cent
(d) 50 per cent
Answer: (c) 25 per cent
Q2. The additional penal tariff announced by the US on India in August 2025 was:
(a) 10 per cent
(b) 15 per cent
(c) 25 per cent
(d) 30 per cent
Answer: (c) 25 per cent (additional to the April tariff)
Q3. According to Economic Survey 2025-26, which of the following reforms was NOT implemented in response to economic challenges in 2025?
(a) GST overhaul
(b) Opening nuclear power to private sector
(c) Withdrawal from WTO
(d) Labour codes notification
Answer: (c) Withdrawal from WTO
Q4. The Economic Survey 2025-26 uses the term "geostrategic globalisation" to describe:
(a) Trade driven purely by cost efficiency
(b) Trade shaped by security and political considerations
(c) Complete trade isolation between nations
(d) Trade controlled by international organisations
Answer: (b) Trade shaped by security and political considerations
Q5. According to Economic Survey 2025-26, despite tariff shocks, India's real GDP growth in FY26 is estimated at:
(a) 5.5 per cent
(b) 6.2 per cent
(c) 7.4 per cent
(d) 8.1 per cent
Answer: (c) 7.4 per cent
Conclusion
The US tariff episode of 2025, as analyzed in the Economic Survey 2025-26, represents both a challenge and an opportunity for India. While the tariffs imposed significant pressure on certain export sectors, India's response – focusing on accelerating domestic reforms rather than escalating trade tensions – has been vindicated by continued strong growth. The episode underscores the importance of economic resilience, market diversification, and manufacturing competitiveness in an era of geostrategic globalisation. For UPSC aspirants, understanding this episode provides valuable insights into contemporary trade dynamics and India's evolving role in the global economy.