What the Indian govt needs to do to counter effect of US tariffs

It was the best of times, it was the worst of times – Dickens encapsulated the vibes of the Industrial Revolution better than anyone else. A somewhat similar vibe is resonating across India’s geo-economic landscape today.

Trump and his advisers dominate the airwaves, but scratch the surface and the picture is maddeningly more complex than Trump’s “dead economy” outrage.India’s macro-economic markers (inflation, external account, fisc) are currently at levels deemed near-ideal. There’s also a long-awaited sovereign ratings upgrade and 7.8% GDP growth for Q1 FY2026. But high frequency indicators tracking consumption trends, credit growth and corporate results all show deep (and deepening) slowdown across the board.🔴At 25%, tariffs are manageable. At 50%, pretty much the entire affected basket is uncompetitive. At worst, it will wipe out India’s trade surplus with US. The most affected sectors – textiles, gems and jewellery – are massive jobs sinks. So even successful reshoring will leave many jobs redundant in an economy already struggling with a formal employment problem.🔴 Trump is an offensive-sounding catalyst, but the ease with which the rails have come off Indo-US relations shows the “hesitations of history” were based on firm foundations.

Even if he is now softening towards India, no political constituency in US (including the India Caucus) really pushed back on his attacks. And it isn’t about a maverick president carrying the day. When it comes to wars in West Asia and Ukraine, the Deep State has effectively turned Trump towards its positions, even though he got elected on a premise of stopping both wars.🔴 Even if Russian oil trade was really the reason for the extra 25% tariff, the fact is that discount on Russian oil results in annual savings of $6bn, helping finance the parts of energy subsidy (LPG) not fully financed out of the budget.

Further, today nearly the entire Russian oil trade is settled in INR, creating a buffer equivalent of 1% of GDP to our external account. Last but not least, India’s boycott of Russian oil could send global crude prices higher – every $10/barrel increase in prices bloats India’s import bill by $1.5bn.Beyond Russian oil, market access in agriculture, seemingly the top ask of American negotiators, is the reddest of trade redlines for Indian polity.

Acceptance of US mediation in the Indo-Pak context, seemingly the top American ask on the political side, is an equally red political redline.🔴 India’s biggest leverages are in the two largest pillars of the economy – consumption and services. Unlike goods trade, India’s services trade with US is neatly balanced. A lot more importantly, India, unlike China, has no firewalls for US big tech. Consequently, India’s largest consumer digital products – messaging, payments, social media, entertainment – are overwhelmingly US-origin platforms.

India’s the largest download market for OpenAI.As for the apprehension around potential tariffs on outsourcing, fact is the world’s banks, airlines, insurance companies cannot operate without the massive-scale support set-up in India’s IT hubs and GCCs.🔴But it’s tough to retaliate against US with small trade potatoes when half of India’s naval fleet and the entire domestic fighter fleet depend on US engines.

And tough to simultaneously face off a China that can withdraw engineers critical to operate electronics assemblies.So, India needs a much larger govt spending outlay, to enhance state capacity in a range of areas, but specially focused on R&D and industrial capacity. R&D spends of India Inc are amongst the lowest among major economies and the Indian state needs to step up to fill the gap – there is no other way. Expanding the fisc may cost some brownie points with global rating agencies and investors but will give high ROI at a national development level.

It is up to us to choose, to cling on to the old, make the same mistakes, or forge a different path.The writer is CIO of an asset and wealth management firm