United States President Donald Trump’s decision to raise tariffs on goods from India to 50 per cent could squeeze labour-intensive exports, threaten jobs, and dampen economic growth, observers cautioned. 

The tariff hike – doubling duties from 25 per cent earlier this month – took effect on Wednesday (Aug 27). 

The additional levy is aimed at punishing India for continuing to purchase discounted Russian oil, which Washington argues helps finance Moscow’s war in Ukraine.

What's the impact on India's economy?

Analysts said India’s gross domestic product (GDP) growth could see a 0.4 to 0.8 percentage points drop, cushioned by domestic consumption.

“India's economy is driven by domestic demand, and that sort of gives it a bit of a shield,” said Priyanka Kishore, founder and principal economist at research company Asia Decoded.

“But a 50 per cent tariff rate, even with exemptions, is a very, very high number,” she told CNA938. 

Peter Draper, professor and executive director of the University of Adelaide’s Institute for International Trade, noted that India’s “very big domestic market” means it is less dependent on exports than other countries. 

Still, the world's fifth-largest economy is expected to experience some pains, taking hits in labour-intensive sectors, he told CNA’s Asia First. 

Such sectors include garments, jewellery and seafood, although key industries such as pharmaceuticals could remain largely spared. 

“Many of these jobs are in the informal sector, which is more vulnerable to output downturns like this,” said Kishore. 

What does it say about Trump tactics?

The University of Adelaide’s Draper said whether the extra duties remain in place will ultimately depend on Trump’s approach. 

“He raises the stakes, he plays hardball, and he has done that with a range of countries. India is just the latest manifestation of that,” he added. 

“It is Trump's negotiating style, and ultimately it's his decision as to how he wants to proceed.”

Kishore said communication channels between Washington and New Delhi remain open, despite trade talks breaking down earlier this month.

At the same time, she stressed the need for careful management of relations.

“The situation is even more fluid at this point of time as everybody's looking to hedge against an unpredictable trading partner in the US,” said Kishore. 

“At some point the US has to come to terms that it cannot exist in isolation. It will need allies in the region. It will need its partners back – be it Japan, be it India – if it's going to counterbalance China's influence” she added. 

“That makes me hopeful that all is not lost. But we'll definitely continue to see a much more multipolar world going forward.”

What's next for India?

With the US still its largest export market, India has been working to support its exporters and diversify trade to new destinations.

Experts believe there is growing focus on reframing the tariff setback as an opportunity.

Earlier this month, Prime Minister Narendra Modi announced that an economic task force will be set up to drive the next generation of reforms. It will look to modernise economic laws, reduce compliance costs, and boost India’s competitiveness and self-reliance. 

This comes even as Modi continues efforts to strengthen regional relations.

He will embark on a two-nation tour of Japan and China from Friday to Monday. 

“Regional alliances are clearly in focus here,” said Kishore. “But just a word of caution that all of this has also come with a rhetoric on self-reliance, and here India has to be careful that self-reliance does not slip into inefficient import substitution. 

“So, definitely a lot of scope to turn this into opportunity, but much really depends on how policies are formulated and executed.”

Modi’s trip to China – for the multilateral Shanghai Cooperation Organisation summit starting Sunday – will be his first in seven years.

Asked whether rising tensions with the US could drive India and China closer, Draper said: “At the end of the day, it's in both China and India’s interest to be seen, to be getting closer. 

“But the ongoing geopolitical tensions between them, I think, will supersede any superficial closeness.”