India-US Trade Rift: Scenarios, Spillovers and Strategic Shifts

Since US President Donald Trump’s imposition of a 50% tariff rate on India (25% reciprocal tariff plus a 25% Russia penalty), the standoff between India and the Unites States has continued. In this article, we look at possible scenarios and medium-term implications in light of these tariffs being implemented. India has maintained a defiant stance on protecting farmers’ interests. Multiple outcomes are possible from here, with different implications.

On trade, the US and India have held five rounds of negotiations, where India offered zero tariffs on industrial goods, and agreed to gradually reduce tariffs on US cars, but disagreements emerged over India’s reluctance to open its agriculture (genetically modified crops) and dairy sectors, which are politically important for President Trump. A fundamental misalignment also emerged between the two nations' approaches: India sought a comprehensive bilateral trade agreement, while it appears the Trump administration preferred a quick deal.

India's response has been notably resolute across multiple fronts. Prime Minister Narendra Modi has emphasized unwavering protection of farmers' interests, even at personal cost, and has encouraged citizens to buy goods domestically. Within India, both opposition leaders and business community representatives have rallied behind the government's position, accepting short-term economic pain over perceived international pressure.

In our base case, we assume the 25% reciprocal tariff remains in place through FY26, but the 25% Russian penalty is effective only until November. As such, we expect GDP growth at 6.6% y-o-y in FY26, after considering other policy offsets. On the other hand, if both sides dig in their heels, resulting in a continuation of the 50% tariff rate, then we would expect the hit to GDP growth to be 0.8 percentage points on an annualized rate basis. The current account deficit is also likely to deteriorate to around 1.1% of GDP. We see significant spillovers hitting investment and consumption through job losses in export intensive sectors, with further escalation risks through tariffs or non-tariff barriers.

With the new tariff structure, the cost differential between India and China has narrowed, and between India and Southeast Asian competitors, it has moved in favor of the latter. This could have various effects on the shape of new supply chains such as the negative impact on textiles, leather and toys, and Indian firms possibly relocating their production to lower tariff countries to retain their US customer base. However, this will merely disrupt global value chain integration for India, not derail it entirely.

We expect the government to announce a multi-pronged response, with fiscal and financial support for exporters, focus on export diversification and fast-tracking free trade agreements. More reforms are also likely. Goods and services tax rationalization has already been announced, and we expect further reforms such as FDI liberalization, deregulation, factor market reforms, privatization, and administrative reforms.

For more insight on the impact of US tariffs on India, read our full report here.