On Wednesday, the US President announced that a 25 per cent penalty will be imposed on goods imported from India, for continuing to purchase oil from Russia. This is in addition to the 25 per cent reciprocal tariff announced on July 31, taking the total baseline tariff to 50 per cent.

The reciprocal tariffs have come into force from August 7, and the penalty will be applied 21 days from now, that is from August 27. Goods which are in transit on August 27 but enter the US before September 17 will face the earlier rate of tariffs.

Which items are excluded from these tariffs?

Sectors which are undergoing Section 232 investigation (pharmaceuticals, semiconductors & electronics, among others) are currently exempt from reciprocal tariffs. These exempt items account for approximately 30 per cent of India’s exports.

But this is not a matter of relief because Section 232 allows the US department of Commerce to investigate whether import of the goods threaten national security. If the answer is found to be yes, then additional tariffs can follow. Section 232 tariffs are currently applicable on steel & aluminium (50 per cent) and autos — finished and parts (25 per cent).

What will be the broader impact of the tariff?

India’s exports to the US stood at $86.5 billion in FY25, accounting for 19.5 per cent of our total exports. The US is our largest export partner. The tariff charged on Indian goods earlier was around 3 per cent. The hike to 50 per cent now will certainly make all the imports from India extremely expensive. With India’s competitors such as Vietnam, Indonesia, Malaysia and Philippines facing reciprocal tariffs of less than 20 per cent, Indian goods are going to find fewer takers in the US market. Exporters in the textiles, chemicals and gems and jewellery segments have said that they will face reduction of 50 to 70 per cent in their exports to the US now.

According to Nomura, effective tariff rate of India’s exports to the US will increase from 18.8 per cent after July 31 to 33.8 per cent now. According to GTRI, the 50 per cent tariff can reduce overall Indian exports to the US by 40 to 50 per cent.

With exports to the US accounting for approximately 2.2 per cent of our GDP in 2025, per commerce ministry data, a 50 per cent reduction in the US exports can lead to a decline of at least 30 to 40 basis points in our GDP for FY26, if the rates are not negotiated lower.

What will be the sectoral impact?

Sectors which export a larger share to the US — such as textiles and apparels (37 per cent share), chemicals (15 per cent), electrical machinery (32 per cent share), gems and jewellery (30 per cent share) — are going to feel the heat of these increased tariffs, if implemented.

According to Nomura, “the steep 50 per cent tariff would be similar to a trade embargo, and will lead to a sudden stop in affected export products. The lower value addition and thinner margins across a number of industries (textiles, gem and jewellery) could jeopardise operations, especially of smaller firms that will struggle to compete. The effective tariff rate also makes the burden on India similar to that of China and much higher than ASEAN economies (19-20 per cent), putting India’s goods at a significant disadvantage.”

What will be the impact on stock markets?

The listed stocks in chemicals, textiles, gems and jewellery are not large-cap heavy weights. While stocks like Gokaldas textiles, Kitex, Camlin, Aarti industries, Atul, Bharat forge, Suprajit Engineering, Sona BLW etc will see a sharp reduction in revenue and profitability, the benchmark indices may not be too affected. But there will be the secondary impact of the weakening of external demand for our companies due to the ongoing chaos, which can dampen the outlook for all companies.

If India decides to reduce or stop crude oil imports from Russia, then Reliance and the other OMCs can take a hit. If crude oil prices increase due to this, then margins of all listed companies will get hit. It will be best for investors to tread cautiously for now. 

Is there room for bringing the tariffs lower?

With the enforcement of the penalty set two days after the next round of negotiations for the India-US bilateral trade agreement, the announcement appears to be timed to force India’s hand to stop crude oil imports from Russia. It is possible that the penalty is not enforced.

What are the options before the Indian government?

The MEA has called the penalty, “unfair, unjustified and unreasonable” and has reiterated that the country will continue to protect its interests.

It will try to arrive at a deal with the US trade officials before the August 27 deadline, without compromising agriculture and dairy sector. It will have look for ways to help the affected exporters through subsidies or other schemes. Reduction of crude oil imports from Russia is an option too, given that $87 billion of exports is at stake.

Published on August 7, 2025