Tectonic shifts in geopolitical scenarios often disrupt the economic status quo, redefining the contours of existing relationships. The world is witnessing one such phase where each country, irrespective of its position, has been forced to reimagine its policy priorities for enhanced prosperity and growth. India is in that boat, too, with its special trade partner, the United States of America.
Given the eccentricity of the current American administration, India's trade-linked export sectors today are confronting a dual challenge. A fragile, often understated and under-quantified informal economy (in our case, where more than 80% of the workforce is absorbed by the informal, unorganised space) is facing ever-escalating trade barriers with its largest trading partner, the US. The bilateral trade between these two nations is valued at $131.84 billion, with the US accounting for around 18% of India's total goods exports. The recent US tariffs on Indian exports threaten to exacerbate the structural fragilities that are inherent to India's informal and labour-intensive sectors.
While India's macroeconomic indicators indicate resilience to these trade barriers, with Q1 (April-June) FY26 GDP hitting a five-quarter high of 7.8%, India's microeconomic reality paints a different picture. The informal sector, which employs over 400 million workers, is shrinking, with employment in the informal manufacturing sector falling 9.3% in April-June compared to January-March, dragging down informal sector employment by 2.1% to 12.86 crore. The number of enterprises during the same period also shrunk by -4.7%. Despite headline growth figures signalling resilience, India's informal sector, which employs hundreds of millions, remains exposed to external shocks and structural weaknesses.
Ground Realities
The Ambur-Ranipet belt by the Palar River is home to one of India's largest leather and tanning industries. The industry was booming until recently, when Trump's 50% tariffs on Indian goods hit. In the short time that has followed, over 50 of the 300 or so odd factories in Ambur have shut down. India's leather goods and non-leather footwear exports touched $4.4 billion in 2024-25, with $1 billion being exported just to the United States. Stories are now pouring in. P. Gopi, 42, used to earn Rs 450 a day working as a cutting machine operator at Farida Leather Factory in Chinnavarigam village near Ambur. Both his daughters, who are nursing students, were sent back home because he was unable to pay their fees.
The 50% tariff has dealt a severe setback to India's leather industry. Factories exporting leather goods to Europe, which faces a 20% tariff, continue to operate, but those supplying the US market have either shut down or are in the process of doing that. Some tanneries are relocating their operations to Vietnam and Bangladesh, where tariffs are significantly lower, at around 20%.
Another case with a similar story comes from Tiruppur, which accounts for more than 60% of India's knitwear exports and is one of the primary suppliers for the US market. A cumulative tariff of 64% will make its products much more expensive and much less competitive than those from other countries like Bangladesh, which are subject to tariffs of around 35%.
These tariffs, coupled with structural weaknesses such as the lack of access to formal finance which leaves them unable to effectively scale, invest or deal with the inherent shocks of a globally interconnected economy and supply chain, puts the informal sector in a precarious position.
What The Domestic Market Should Be Prepared For
The US trade barriers will lead to excess inventories and production halts, which, in turn, will reduce domestic activity and force labour-intensive sectors with low profit margins to shift to countries with lower tariff rates, such as Bangladesh or Vietnam. Reduced wages, and, along with that, a reduction in employment growth will lead to a decrease in household consumption. Furthermore, excess goods may also distort domestic pricing.
The Chief Economic Adviser to the Government of India, V. Anantha Nageswaran, recently estimated that the Trump administration's tariffs could reduce India's GDP growth by 0.5% to 0.6%. But the reality may be harsher, as this forecast came before the new pharmaceutical tariffs were announced, which disproportionately affect one of India's most globally competitive sectors. It is undeniable that all sectors will be impacted in one way or another, but those hit the hardest will be the export-oriented sectors.
Two Key Industries
Taken together, the data on India's export basket makes it clear why these measures are particularly damaging. The top ten sectors account for nearly 69% of India's total exports to the United States, meaning that the brunt of the American tariffs fall on a concentrated set of industries. Within this group, two industries in particular stand out.
The electrical and electronic equipment sector (15.5% of total exports) is at the top of this table, placing India foremost in assembly and components exports. Tariffs in this particular sector are especially dangerous as they risk undercutting "Make in India" ambitions, just when our production-linked incentives were starting to deliver.
Gems Losing Their Sheen
The employment heavy, labour intensive, gems and precious stones sector comes next. This sector accounts for 11.5% of India's exports and is highly vulnerable because of slim margins. Even small price disadvantages here make Indian exports uncompetitive in American markets. Already, there are indicators that the industry is under strain. Workshops in Gujarat, which employ between 8-10 lakh workers spread across nearly 600 diamond polishing units, have reportedly begun scaling back working hours and holding off on new recruitment. The reliance on the US market only magnifies this fragility
America alone takes in nearly $10 billion worth of cut and polished diamonds annually from India, representing almost 30% of the global trade in this segment. With Washington now revising tariffs sharply upwards, India's polished diamond exports are directly in the line of fire. This is not just a hit to exporters but a systemic shock that will and is already reverberating down the entire value chain, from large firms that dominate the international diamond trade to the small polishing units that sustain local employment. Given the thin operating margins in this business, a tariff wall of this scale risks pushing the sector into paralysis, effectively wiping out its competitiveness in the US and leaving lakhs of families dependent on diamond polishing exposed to sudden economic insecurity.
Sectors At Serious Risk
Other sectors such as machinery (8.2% of total exports), iron and steel (3.7%), and vehicles (3.3%) are more capital-intensive and are partially buffered by domestic demand, but their export-oriented nature still leaves them exposed to Trump's tariffs. Meanwhile sectors like textiles and apparel (6.9% combined share of total exports for apparel and other textile articles) are among the most labour-intensive, with tariffs threatening millions of informal sector jobs in places like Tiruppur and Ludhiana.
In effect, at a more granular and sectoral level, labour-intensive industries such as gems, textiles, and apparel will absorb the heaviest blow in terms of employment, while high-value sectors such as pharmaceuticals and electronics will face long-term competitiveness risks.
The tariffs imposed by the US highlight the fragility of India's export-reliant informal sectors and the human cost that arises as a consequence. The structural gaps in India's informal economy, particularly limited access to finance, low productivity and an inability to scale, amplify the impact of these externally imposed barriers, turning this trade disruption into a systemic challenge for the millions of workers that depend on these sectors. Without a diversification of export destinations, addressing of financing gaps and a rethinking of India's comparative advantages, these shocks may soon translate into widespread economic and social distress, haunting India for years to come.
(Deepanshu Mohan is Professor of Economics and Dean, O.P. Jindal Global University. He is a Visiting Professor at the London School of Economics and an Academic Research Fellow, AMES, University of Oxford. Nagappan Arun studies economics at Jindal School of Government and Public Policy and is a Research Analyst with the university's Centre for New Economics Studies)
Disclaimer: These are the personal opinions of the authors
