Tariffs, trade wars and exports: India’s merchandise trade deficit narrowed to a three-and-a-half-year low of $14.05 billion in February, significantly below the average of over $23 billion in the first ten months of FY25. The current account is expected to post a surplus of about $5 billion in Q4FY25, equivalent to approximately 0.5% of GDP. While falling exports remain a concern, the sharp drop in imports suggests weaker demand for foreign goods, potentially creating opportunities for domestic industries to step in.
India’s exports have been contracting, with outbound shipments dropping 10.9% year-on-year to $36.91 billion in February, marking the sharpest decline in 20 months. Officials attributed this to a high base of $41.4 billion the previous year, but the broader concern remains the disruption caused by unstable US trade policies.
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Steel and aluminium exporters have reported that $5 billion worth of Indian goods have already been affected by Trump’s 25% tariffs on these metals. Meanwhile, India’s non-petroleum, non-gems-and-jewellery exports—a crucial indicator of export strength—fell nearly 5% to $28.57 billion. While electronics and rice exports rose, key sectors such as chemicals, petroleum, and engineering suffered declines.
India and the trade wars
India has often turned to economic reform in times of crisis, most notably in 1991 when it embraced liberalisation to overcome a financial crisis. Today, amid the upheaval created by Trump’s tariff wars, India finds itself at another inflection point.
Trump sees India a ‘tariff king’ due to its trade-weighted import duties which stand at 12% — far higher than the US (2.2%), China (3%), and Japan (1.7%). High tariffs raise costs for companies reliant on global supply chains, making it harder for them to compete internationally, while also making imported goods more expensive for Indian consumers. Despite some export growth — driven largely by services — India’s share of global exports remains a paltry 1.5%.
The question now is whether India will use the current trade turbulence as a catalyst for further openness or double down on protectionism. The Modi government has taken steps to recalibrate trade policy, lowering tariffs on select US goods such as Bourbon whiskey and motorcycles ahead of a meeting with Trump. Commerce minister Piyush Goyal has also urged Indian exporters to abandon their protectionist mindset and embrace global trade.
India is actively negotiating free trade agreements with the UK, New Zealand, and the EU, signalling a potential shift toward deeper integration with global markets. However, without broader tariff reductions and structural reforms, India risks missing out on the opportunities created by shifting supply chains. This could be India’s 1991 moment, but whether it seizes the opportunity remains uncertain.
India needs to embrace reforms
Protectionist policies have long stifled India’s export competitiveness. Economists like Viral Acharya and Rajeshwari Sengupta argue that high tariffs have led to inefficiencies and a lack of global competitiveness, preventing the country from scaling up manufacturing exports. Unlike China, which leveraged low-end manufacturing to create employment and boost exports, India’s labour-intensive industries, such as textiles and garments, have struggled under protectionist policies.
As the world re-evaluates supply chains, India has a rare opportunity to integrate more deeply into global trade networks. The challenge is whether policymakers will embrace the structural reforms needed to boost competitiveness or maintain restrictive policies that risk leaving India behind.
The Economic Survey 2024 has highlighted rising protectionism and geopolitical uncertainties as significant challenges, recommending a strategic trade roadmap to improve India’s export competitiveness. To remain relevant in global trade, India must take decisive action. Lowering high import duties will enhance competitiveness and attract foreign investment, making Indian products more affordable in global markets. Strengthening infrastructure, including upgrading ports, roads, and logistics networks, is essential to reduce trade costs and improve efficiency.
Supporting small and medium-sized enterprises through capacity-building programs and financial assistance will be critical in helping them navigate international trade complexities. Additionally, diversifying export markets through trade deals with the UK, EU, and Southeast Asia can mitigate the risks of trade conflicts and reduce India’s reliance on a few partners.
India stands at a crossroads. The rising tide of global protectionism and trade wars presents a formidable challenge, but also an opportunity. By reducing tariffs, boosting manufacturing exports, and pursuing trade liberalisation, India can position itself as a central player in global trade. The question remains: will it take the bold steps required, or will it retreat into economic insularity?