US President Donald Trump has imposed an additional 25 percent tariff on Indian products, effective August 27, raising the total tariff to 50 percent. The US administration's notification indicates that this extra tariff serves as a penalty for India's purchase of oil from Russia. This decision may prove detrimental not only for India but also for the US, as it could have major economic repercussions.
According to a report from the State Bank of India (SBI), the high tariffs could adversely affect the US economy, increasing the likelihood of a downturn. Additionally, the elevated tariffs on Indian products are expected to contribute to rising inflation, while potentially stunting economic growth.
US GDP Growth could be hit
The SBI report suggests that the new tariffs could result in a decrease in US GDP growth by 40-50 basis points (bps). Furthermore, inflation may surge due to a weakened US dollar and increased costs. Certain sectors in the US that rely heavily on imports—such as pharmaceuticals, automobiles, electronics, and consumer durables—are already feeling the impact of these tariffs. The report also indicates that the US Federal Reserve's projected inflation target for 2026 is 2 percent, but this rate may be exceeded due to the effects of the tariffs.
Indian products would be affected
The US administration's high tariffs affect Indian products valued at approximately $45 billion, significantly impacting labor-intensive sectors like textiles and gems and jewelry. However, it is noteworthy that pharmaceuticals, steel, and smartphones are exempt from these tariffs.
Trade Relations at Risk
The SBI report raises concerns that if the 50 percent tariff remains in place on India's $44 billion in exports, trade between the two nations could decline. Nevertheless, the report also highlights that through trade negotiations, trust could be rebuilt between New Delhi and Washington, potentially leading to increased exports to the US.