India's Economy at Risk From Higher Tariffs, Says Former Adviser

India’s economy faces increasing risks from U.S. trade policy, with former Chief Economic Adviser Arvind Subramanian warning that higher tariffs could undermine growth. Despite a robust advance estimate of 7.4% GDP growth for 2025-26, Subramanian highlighted uncertainties around the accuracy of the data and the limited room for recovery according to Bloomberg. He warned that if the economy grows at a similar pace in 2026, India would be fortunate given the current climate of global and trade-related challenges as reported.

The United States has imposed 50% tariffs on Indian goods, partly in response to New Delhi’s oil purchases from Russia as cited by Nikkei Asia. These tariffs could worsen if a long-awaited U.S.-India trade deal fails to materialize. A proposed 500% tariff on Indian goods under the 'Sanctioning Russia Act of 2025' has further raised concerns about the potential for a sharp decline in exports according to Business Standard. Indian manufacturing is expected to grow 7% in 2025-26 as reported by Nikkei Asia, but this may slow if trade barriers persist according to Business Standard.

India’s fiscal position also remains fragile, partly due to cuts in the Goods and Services Tax. Subramanian noted that while the country’s macroeconomic fundamentals are strong, its public finances are not as robust. He also emphasized the need for greater flexibility in India’s currency policy to support exporters amid external shocks.

Why Did This Happen?

The U.S. tariffs have emerged as a major drag on India’s trade ambitions. The U.S. government has cited sanctions against countries trading with Russia as the rationale for the higher tariffs. India’s imports of Russian oil have drawn criticism from Washington, leading to the imposition of additional duties on Indian exports. The bipartisan nature of the proposed Sanctioning Russia Act means that the 500% tariff could be difficult to block in Congress.

Indian exports to the U.S. have remained resilient despite the tariffs, growing 11.3% year-to-date through November 2026. This resilience is attributed to retained supply chains and optimism about eventual trade deal negotiations. However, the recent pause in trade discussions between the two countries adds to the uncertainty.

How Did Markets Respond?

India’s currency, the rupee, has shown mixed performance amid the trade tensions. The Reserve Bank of India (RBI) has intervened multiple times to stabilize the rupee, which hit an intraday low of 89.98 before rebounding to 89.75. However, the move was not enough to fully offset concerns over the U.S. tariff proposals and equity market outflows.

Bankers have advised importers to maintain higher hedge ratios, citing the uncertain trade outlook. The rupee’s forward premiums have risen as importers locked in future exchange rates to mitigate potential depreciation. The RBI’s own short positions in the forward market have also contributed to market volatility.

What Are Analysts Watching Next?

Market participants are closely monitoring the U.S. non-farm payrolls report, expected to provide clues about the Federal Reserve’s policy direction. A strong jobs report could lead to higher U.S. interest rates, increasing pressure on the rupee and Indian equities.

Meanwhile, the outcome of the U.S. Sanctioning Russia Act remains a key wildcard. Analysts are also watching India’s ability to diversify its export markets and reduce reliance on the U.S. A trade deal with Washington could help alleviate some of the pressure, but the current political climate under President Trump suggests such an agreement is unlikely.

India’s public finances are also under scrutiny, with experts urging the government to rein in fiscal deficits and avoid further strain on the economy. The implementation of key economic reforms, such as labor and tax policies, will be critical in sustaining growth and mitigating the impact of external shocks.