India's Export Sectors in the Crosshairs: Navigating the Modi-Trump Trade Dispute

The Modi-Trump trade dispute has escalated into a defining challenge for India's export-driven economy, with U.S. tariffs on Indian goods surging to 50% in August 2025. This escalation, rooted in India's continued imports of Russian oil, has exposed vulnerabilities in sectors like textiles, electronics, and luxury goods while simultaneously creating opportunities for strategic reallocation of capital and supply chain diversification. For investors, the conflict underscores the duality of emerging markets: volatility as a risk and resilience as a reward.

The Tariff Shock: Winners and Losers in India's Manufacturing Sector

The U.S. tariffs have disproportionately impacted India's labor-intensive industries. Textiles and gems & jewelry, which account for nearly 30% of India's exports to the U.S., now face a 50% duty, eroding their competitiveness against rivals like Vietnam and Bangladesh. S.C. Ralhan of the Federation of Indian Export Organisations notes that 55% of India's U.S. shipments are now at risk, with costs rising sharply for firms like Raymond Group and Titan Company.

The automotive and electronics sectors are also under pressure. Apple's India manufacturing hub, once a beacon of “Make in India” success, now faces higher costs as U.S. tariffs erode margins. Tesla, which has struggled to establish a foothold in India, saw its stock price drop 17% in 2025 amid trade uncertainty. These developments highlight the fragility of export-dependent manufacturing in a protectionist climate.

However, the crisis has accelerated a shift toward capital-intensive, high-value sectors. India's electronics manufacturing sector, bolstered by the Production-Linked Incentive (PLI) scheme, has grown 200% since 2019. Firms like Foxconn and Flex are expanding in India, leveraging lower U.S. tariffs compared to China (30%) and Mexico (30%). This pivot mirrors global trends toward “reshoring” and diversification, offering long-term growth potential for investors.

Pharmaceuticals: The Insulated Sector

India's pharmaceutical industry, a cornerstone of its global trade, remains largely shielded from direct tariff penalties. U.S. imports of Indian generic drugs—worth $9 billion annually—have been spared, reflecting the sector's strategic importance to the U.S. healthcare system. This insulation has attracted capital inflows, with healthcare's share of Indian private equity/venture capital investments rising to 17% in H1 2024.

Private equity firms like Advent and Carlyle are building platform companies through acquisitions of API manufacturers and contract development organizations (CDMOs). Advent's Cohance, for instance, has expanded via CDMO acquisitions, positioning itself as a global player. Meanwhile, the government's $3 billion PLI for pharmaceuticals and medical devices has drawn $4 billion in investments, reducing reliance on Chinese APIs and boosting domestic production of biosimilars.

Yet, the sector is not without risks. Rising U.S. tariffs on other sectors could indirectly pressure pharmaceuticals by diverting capital and talent. Additionally, geopolitical tensions may spur U.S. demands for reciprocity, such as opening India's dairy market—a red line for Modi's government. Investors must balance the sector's resilience with these overhangs.

Diversification as a Long-Term Strategy

India's response to the trade dispute has been a masterclass in strategic diversification. The India–UK Free Trade Agreement (FTA), signed in July 2025, is projected to boost bilateral trade by $34 billion annually, while the India–EFTA Trade and Economic Partnership Agreement (TEPA) includes a $100 billion investment commitment over 15 years. These agreements, coupled with expanded FTAs with ASEAN and the UAE, are reducing India's dependence on the U.S. market.

The government's $2.4 billion export support package, set to launch in September 2025, will further cushion exporters. This includes interest subsidies, loan guarantees, and digital infrastructure for MSMEs. Such measures are critical for sectors like textiles, where smaller firms lack the scale to absorb tariff shocks.

For investors, the key lies in identifying sectors poised to benefit from this diversification. The pharmaceutical and electronics manufacturing industries, with their high barriers to entry and global demand, offer compelling long-term opportunities. Conversely, luxury goods and textiles remain high-risk, with Vietnam and Bangladesh likely to capture market share.

The Path Forward: Hedging and Positioning

The Modi-Trump dispute is a microcosm of broader geopolitical risks in emerging markets. While tariffs create short-term pain, they also catalyze structural shifts—reshoring, supply chain diversification, and policy reforms—that can enhance long-term resilience.

Investors should adopt a dual strategy:
1. Hedge against volatility by shorting U.S.-exposed sectors like luxury goods and textiles, while long-term positioning in insulated industries like pharmaceuticals and semiconductors.
2. Leverage India's FTAs by investing in firms expanding into the UK, EFTA, and ASEAN markets.

In conclusion, the Modi-Trump trade dispute is a test of India's economic adaptability. For investors, it presents a rare opportunity to capitalize on a country recalibrating its global trade strategy. By focusing on insulated sectors and strategic diversification, the risks of protectionism can be transformed into a foundation for sustained growth.