Tariff shock: A wakeup call for India

In an unexpected development, India now faces a 50 per cent tariff on its goods exports to the United States, a hurdle higher than that of almost any other country in the world.

- RAJESWARI SENGUPTA

As a result, the government needs to consider how it should respond. While there are political considerations that it will need to take into account, the objective is clear from an economic point of view: Mitigate the damage, so India can return to rapid growth. Unfortunately, this task is complicated because overseas prospects have dimmed even as the domestic economy has been slowing down.

How severe is this tariff shock? Many analysts have argued that its impact will be limited. They point out that goods exports to the US account for only 2 per cent of India's gross domestic product or GDP, only two-thirds of which will be affected, since pharmaceuticals, electronics, and petroleum products have been exempted.

However, this line of reasoning overlooks the bigger picture. The US is not just India's largest export market—it is also a critical economic partner. Consequently, the tariff shock will not only affect trade flows—it will rattle investor confidence, disrupt supply chains, and chip away at India's long-term export competitiveness. The real risk lies in these ripple effects, which extend far beyond the immediate numbers.

To understand why, consider the plight of three types of firms.