India’s economy entered 2025 with momentum few emerging markets could match.
Extreme poverty had nearly vanished, an S&P sovereign credit upgrade had lowered capital costs, and GDP growth was running at the fastest pace in Asia.
Investors spoke of a once-in-a-generation chance for India to evolve from a service-led economy into a global manufacturing hub.
Then Donald Trump doubled tariffs on Indian goods to as high as 50%. What began as punishment for India’s Russian oil purchases has escalated into the most severe trade rift between Washington and New Delhi in decades.
The shock has thrown into question not just India’s short-term growth outlook but also the viability of its long-term economic strategy.
Why tariffs matter more to India than to America
The US imported about 86.5 billion dollars of goods from India last year. Two-thirds of that flow is now covered by the 50% tariff.
According to a report by the Global Trade Research Initiative, the worst hit sectors are textiles, gems and jewellery, seafood and leather.
Exporters expect sales to the US to fall as much as 70% in these industries, wiping out hundreds of thousands of jobs. GTRI estimates overall exports to the US could fall to 50 billion dollars in 2026.
From the perspective of the US, India accounts for less than 3% of total imports. But for India, the US is the largest single export market, accounting for about 18% of all shipments. There is a clear asymmetry here, meaning India has much more to lose.
Source: Reuters
Indian exporters are already at a cost disadvantage. Garment producers face input and logistics costs roughly 30% higher than Bangladesh and Vietnam. With a 50% tariff wall, they lose competitiveness entirely.
Even if tariffs are rolled back later, rivals may already have secured permanent contracts with US buyers. Investors should note this could accelerate supply chain relocation to Vietnam and Mexico, not just away from China but away from India as well.
Cheap Russian oil versus lost exports
Trump’s trigger for the tariffs was India’s refusal to stop buying Russian crude. Russia now supplies around 40% of India’s oil needs, up from less than 1% before the Ukraine war.
Indian refiners have saved an estimated 17 billion dollars by buying discounted Russian oil since 2022.
But those savings look small compared with a potential 37 billion dollar export loss from the tariffs this year alone. This means that what India gained in energy discounts, it may now lose twice over in export earnings.
For investors, this matters because energy security had been a bright spot. Cheap oil was one reason inflation stayed moderate and consumption strong.
If those savings are eclipsed by collapsing exports and weaker employment in labour-heavy industries, the net effect on India’s economy turns negative.
A wake-up call for India’s manufacturing dream
The tariff shock exposes a hidden weakness in India’s growth model. Services make up about 60% of GDP and remain globally competitive.
Pharmaceutical exports, worth 8.7 billion dollars to the US in 2024, are exempt from tariffs. IT services firms such as Infosys and TCS still earn at least half their revenues from American clients.
But manufacturing, the sector India needs to create mass employment, is bearing the brunt of the tariff war. This underlines a big risk that India’s reliance on services acts as a cushion, but it also creates complacency.
It allows the economy to weather external shocks without forcing the reforms needed for large-scale industrialisation.
Investors should recognise this “services trap” as India’s central challenge. The middle class can keep growing on IT and pharma, but hundreds of millions leaving agriculture will not find jobs in coding or drug labs.
How Modi is responding and what it means for investors
Prime Minister Narendra Modi has promised tax cuts, GST simplification and subsidies to protect exporters. Indian consumers are being advised to shop locally.
A multibillion-dollar package is reportedly being prepared to provide credit relief. Salaries for nearly five million state employees and 6.8 million pensioners are set to rise next year, supporting domestic demand.
But subsidies cannot offset a 50% tariff. Nor can they stop global buyers from shifting supply chains elsewhere. The real question for investors is whether this crisis pushes India toward reform or toward retreat.
On the reform side, New Delhi could cut its own high tariffs on agricultural imports, which average 39%, and open up negotiations for deeper trade deals with the EU and ASEAN.
It could consolidate its fragmented special economic zones into a handful of large, city-scale hubs with real autonomy, replicating the model that helped China dominate global supply chains. It could also incentivise states that reform land and labour rules to attract capital more effectively.
On the retreat side, India could double down on self-reliance, use the tariff shock as justification for protectionism, and lean harder on Russia and China.
Modi is already scheduled to meet Xi Jinping in China for the first time since their border clash in 2020, which may indicate strategic hedging. This path preserves short-term stability but risks locking India into a service-heavy growth pattern that cannot absorb its vast labour force.
Where the investment opportunities and risks lie
Looking ahead, investors could prepare for some specific scenarios.
The base case is incremental reform. Growth slows from 6.8% to about 5.5% this year but stabilises as domestic demand holds up and some export diversification takes place. Equity markets may lag peers like Vietnam and Mexico, where supply chains are actively relocating.
The optimistic case is transformational. India seizes the crisis to lower its own tariffs, attract fresh investment into large industrial hubs, and accelerate trade deals with Europe and Asia.
That would turn today’s shock into a catalyst, making India the world’s most attractive China alternative by the late 2020s.
The pessimistic case is retreat. India leans inward, subsidises loss-making exporters, and relies on services and energy deals with Russia to cushion the blow.
Growth slips to the low 5s and the chance to become a manufacturing powerhouse is lost. Services remain strong, but the promise of mass employment never materialises.
Investors should watch carefully which path Modi takes in the coming months. GST reform, the scope of the export relief package, and the outcome of talks with the EU will be key indicators. The rupee’s trajectory may also act as an indirect support for exporters if depreciation is allowed.
Services dependence threatens India’s economy
The tariff shock has put India’s structural weakness into sharper relief. Investors often focus on the growth story. The 8.8% GDP expansion between 2022 and 2024, which is now expected to settle at 6%. But behind those numbers lies a deeper fragility.
India’s services sector is globally integrated and resilient. But it is also concentrated. A heavy reliance on US demand for tech services, pharmaceuticals and global capability centres makes India more exposed to American policy than it appears.
While tariffs target goods, the same logic could one day extend to services, where US firms are deeply embedded in India. That risk is rarely priced in.
The bigger risk is social. If India fails to create large-scale manufacturing jobs, it risks leaving hundreds of millions of people in insecure informal work. That would cap consumption growth and weaken the very domestic demand that investors rely on as India’s long-term story.
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