India has historically embraced economic reforms during crises, with the 1991 liberalization serving as a prime example. Today, with U.S. President Donald Trump’s tariff wars disrupting global trade, many believe India faces a similar turning point. The question remains: will the world’s fifth-largest economy use this moment to shed its protectionist policies and open up further, or will it retreat into economic isolation?
Trump has repeatedly criticized India as a “tariff king” and a “big abuser” of trade relations. India’s trade-weighted import duties—representing the average tariff across imported goods—are among the highest globally. The U.S. average stands at 2.2%, China’s at 3%, and Japan’s at 1.7%, while India’s is a steep 12%, according to World Trade Organization data.
High tariffs increase costs for businesses relying on global supply chains, reducing their ability to compete in international markets. Additionally, Indian consumers pay more for imported goods than their global counterparts. Despite steady export growth—mainly driven by the services sector—India runs a significant trade deficit. With the country’s share of global exports standing at just 1.5%, the urgency for change is clear.
The impact of Trump’s trade war on India remains uncertain. While it could serve as a catalyst for reform, there’s also a risk that India will entrench its protectionist stance. The Modi administration, often criticized for shielding domestic industries, appears to be reassessing its strategy.
Ahead of Prime Minister Narendra Modi’s meeting with Trump in Washington, India voluntarily reduced tariffs on several American products, including Bourbon whiskey and motorcycles. Commerce Minister Piyush Goyal has made two U.S. visits in response to Trump’s threats of retaliatory tariffs, which could take effect on April 2. Analysts at Citi Research estimate these tariffs could cost India up to $7 billion annually, particularly impacting metals, chemicals, and jewelry, while also affecting pharmaceuticals, automobiles, and food products.
In a shift from previous rhetoric, Goyal recently urged Indian exporters to abandon their “protectionist mindset,” encouraging them to compete globally with confidence. India is also actively negotiating free trade agreements with the U.K., New Zealand, and the European Union.
An unexpected development in U.S.-India economic ties has been the collaboration between Indian telecom giants Reliance Jio and Bharti Airtel with Elon Musk’s SpaceX. Together, they plan to launch Starlink satellite internet services in India. This partnership surprised analysts, given Musk’s past conflicts with both companies, and comes as the U.S. and India work toward a trade agreement.
India’s economic rise between the late 1990s and early 2000s was largely driven by its gradual integration into global markets. Between 2004 and 2009, the economy grew at an average of 8.1%, followed by 7.46% growth from 2009 to 2014. Pharmaceuticals, software, automobiles, textiles, and garment industries benefited from lower tariffs. However, in recent years, India has reversed this trend, adopting inward-looking policies.
Some economists argue that these protectionist policies have hindered the success of Modi’s “Make in India” initiative, which prioritizes capital- and technology-intensive industries over labor-intensive ones such as textiles. Consequently, manufacturing and exports have struggled to gain traction.
High tariffs have also fostered complacency among domestic industries, discouraging efficiency and innovation. Viral Acharya, an economics professor at New York University’s Stern School of Business, argues that this has led to a situation where “cosy incumbents” consolidate their market positions without facing genuine competition. In a Brookings Institution paper, Acharya suggested that reducing tariffs would boost India’s share of global trade and mitigate the negative effects of protectionism.
India’s already-high tariffs make any further increases potentially damaging. “We need to boost exports, and a tit-for-tat tariff war won’t help us,” says Rajeswari Sengupta, an associate professor of economics at Mumbai’s Indira Gandhi Institute of Development Research. “China can afford this strategy due to its massive export base, but we can’t, as we hold only a small share of the global market. A trade conflict could hurt us more than others.”
With shifting global trade dynamics, India has a unique opportunity to redefine its economic trajectory. Trade expert Aseema Sinha of Claremont McKenna College believes India could lead a new era of global commerce by lowering trade barriers within South Asia and strengthening ties with Southeast Asia and the Middle East.
“By reducing tariffs, India could become a regional and cross-regional magnet for trade and economic activity, drawing in varied powers in its orbit,” says Sinha, author of Globalising India.
Reducing trade barriers could also address India’s pressing employment crisis. Agriculture, which contributes only 15% of GDP, still employs 40% of the workforce, highlighting low productivity levels. Construction remains the second-largest employer, largely relying on informal labor.
India’s challenge is not in expanding its service sector, which already accounts for nearly half of total exports, but in absorbing its large, unskilled workforce. “While high-end services are thriving, the majority of the workforce remains uneducated and underemployed, often relegated to construction or informal jobs,” Sengupta explains. “To provide meaningful employment to millions entering the workforce each year, India must ramp up its manufacturing exports. Relying solely on services won’t solve the problem.”
A key concern with reducing tariffs is the potential for foreign dumping—where companies flood the market with cheap goods, threatening domestic industries.
Sengupta suggests that India adopt a “universal reduction” in import tariffs while using targeted non-tariff barriers against China in cases of proven dumping. “To protect against this, India can use non-tariff barriers against China but only against this one country and only in cases of proven dumping. Barring that, it is in India’s interest to do a wholesale slashing of tariffs,” she argues.
Some analysts worry that India is too eager to accommodate U.S. trade demands. Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), believes India’s tendency to adjust trade policies “based on rhetoric rather than economic pressure” weakens its negotiating position.
Compared to other major economies, India appears especially susceptible to external pressure. “India’s pre-emptive surrender on multiple trade fronts—without the U.S. imposing a single country-specific tariff—makes it appear exceptionally vulnerable to pressure tactics,” Srivastava warns.
Despite concerns over bargaining power, many experts believe Trump’s tariffs could unintentionally drive India toward much-needed reforms. HSBC’s chief India economist, Pranjul Bhandari, sees this as an opportunity. “Potential U.S. tariffs may have become a catalyst for reforms,” she writes.
If Trump’s second term leads to further supply chain disruptions, and global markets seek alternative production hubs, India could benefit. However, achieving this transformation won’t be easy. India has largely missed out on the era of low-end, unskilled factory work that helped China dominate global manufacturing for decades. With automation on the rise, the window for industrial expansion is closing.
Without deeper economic reforms, India risks being left behind. The path it chooses—embracing globalization or doubling down on protectionism—will shape its economic future for decades to come.