U.S. punitive tariffs on India take effect; New Delhi pledges aid

A new 25 percent punitive tariff on Indian goods bound for the United States took effect on Tuesday, escalating trade tensions between the two countries. 

Washington justified the measure by pointing to India's imports of Russian oil, but New Delhi has condemned the move as politically motivated and economically damaging.

The latest hike brings cumulative U.S. tariffs on Indian products to 50 percent, a level economists warn could undercut India's export sector and decrease economic growth.

Tariff hikes impact Indian economy

The Indian government estimates the tariffs will impact $48.2 billion worth of exports. Consultancy Capital Economics forecast that the tariffs would shave 0.8 percentage points off India's economic growth this year and next.

Ajay Srivastava, a former Indian Trade Service officer and the founder of the Global Trade Research Initiative, told AP that the tariff a "strategic shock" that could trigger large-scale job losses in key export hubs and weaken India's role in global supply chains. 

Exporters are already feeling the pinch. According to Reuters reports, a lot of U.S. customers have stopped placing new orders to India. Pankaj Chadha, chairman of the Engineering Export Promotion Council told Reuters, "We anticipate a 20 percent to 30 percent drop in shipments of affected goods."

Individual exporters echoed the concern. Shamim Azad, who runs an export business, told Reuters an American client emailed on August 16 instructing him to stop production until the tariff issue was resolved. He added that some Indian factories are still trying to sell elsewhere, but many that rely heavily on the U.S. market have shut down.

Government pledges support

Faced with growing anxiety from exporters, the Indian government pledged fiscal support to companies hit by the tariffs. Finance officials said companies suffering losses would be eligible for fiscal assistance, including expanded subsidies on bank loans and credit guarantees.

Beyond the measures, New Delhi is also seeking longer-term solutions. According to Indian media reports, the government is redoubling efforts to negotiate free trade agreements (FTAs) with key partners to diversify export markets. Textile, food processing, leather and seafood industries have been identified as priority sectors for diversification.

Prime Minister Narendra Modi underscored his determination during a speech in Ahmedabad on Monday. He stressed that the India's small entrepreneurs, farmers and herders will not be left to suffer. "Whatever the pressure, we will build strength to withstand it," Modi said.

He has also vowed to accelerate adjustments to the goods and services tax system to reduce the tax burden, empower small and medium-sized enterprises and boost economic confidence.

Economists say the tariffs could push India into a more challenging macroeconomic environment. Radhika Rao, a senior economist at DBS based in Singapore, stated in a recent report that downside risks may compel the Reserve Bank of India to expand credit and liquidity support. 

Reserve Bank Governor Sanjay Malhotra on Monday said the central bank is ready to step in with policy measures to support the economy.

The tariff row has already derailed trade talks. A planned round of India-U.S. negotiations scheduled for August 25-29 was postponed after the U.S. trade delegation canceled its visit. The two sides have held five rounds of talks without agreement.

U.S. Treasury Secretary Robert Bessent said earlier this month that Washington hoped to conclude pending trade agreements with India, Switzerland and other partners by the end of October.