The doubling of US tariffs on Indian goods, now reaching an effective 50% following an executive order by President Donald Trump, marks a structural inflexion point in India-US trade relations. The tariff, justified by the United States on the grounds of India's continued crude oil imports from Russia, has been condemned by India's Ministry of External Affairs as "unfair, unjustified, and unreasonable".
Analysts, including Goldman Sachs, have flagged a cumulative downside of 60 basis points to India's real GDP growth, 0.3 percentage points from the April round and another 0.3 percentage points from the August escalation. Although exclusions under Section 232 of the US Trade Expansion Act, 1962, will reduce the average effective tariff to 32%, the escalation still constitutes the most severe trade penalty imposed on India since the inception of the World Trade Organization (WTO). With a three-week window until implementation on August 27, the episode presents not only a legal and economic challenge but a critical test of India's capacity to respond to a new era of strategic economic coercion.
The Full Impact
At the aggregate level, the macroeconomic exposure appears containable. Indian exports to the US stood at approximately USD 86.5 billion in FY2025, comprising less than 2% of India's gross domestic product (GDP). Accounting for tariff-exempt categories such as pharmaceuticals and electronic components, and controlling for domestic value addition, India's net GDP exposure to the tariff shock is in the range of 1.2 to 1.3%. Even under a high elasticity assumption of -1.5, with full tariff pass-through and zero trade diversion, the estimated contraction in output is constrained to 40-50 basis points.
However, the sectoral dislocation is more material. High-growth export segments, particularly electronics and mobile components, are susceptible to substitution effects by lower-tariff jurisdictions, such as Vietnam and Mexico. Similarly, labour-intensive sectors, such as textiles, leather, and jewellery, exhibit high tariff sensitivity due to thin profit margins and high price elasticity of demand.
Are These Tariffs Valid?
From a legal standpoint, the measure constitutes a prima facie violation of the United States' obligations under the WTO framework. Prabhash Ranjan, in his analysis, has shown how, specifically, it contravenes Article I of the General Agreement on Tariffs and Trade (GATT), which mandates unconditional Most-Favoured-Nation (MFN) treatment. The selective targeting of India undermines the principle of non-discrimination. Moreover, the unilateral imposition of duties in excess of bound rates violates Article II of the GATT, which constrains tariff increases beyond committed ceilings. The United States may invoke Article XXI (Security Exceptions) as a justificatory device; however, WTO jurisprudence, particularly in Russia-Traffic in Transit (WT/DS512/R), has clarified that such invocations are justiciable. The panel established that for a valid invocation of Article XXI(b)(iii), the measure must be adopted in good faith, be objectively linked to a defined "emergency in international relations", and demonstrate proximity and necessity. India's import of discounted Russian Urals crude, with a marginal cost advantage of approximately USD 2-3 per barrel, yielding aggregate savings of USD 1-2 billion per annum, does not meet this threshold under any credible interpretive lens.
The juridical debate, however, is rendered moot by the institutional paralysis of the WTO dispute settlement system. Since December 2019, the WTO's Appellate Body, the final adjudicatory instance, has been rendered inoperative due to the US blocking of member appointments. Consequently, even if India were to secure a favourable panel ruling, the absence of appellate review and enforceability negates the utility of the multilateral legal process.
The Real Rationale
The strategic rationale for the tariff action is neither economic nor legal; it is geopolitical. The executive rationale references India's continued energy engagement with the Russian Federation and its active participation in forums such as BRICS. These, however, fall entirely outside the domain of WTO-justiciable trade behaviour. Their invocation constitutes a paradigmatic case of issue-linkage coercion, where unrelated foreign policy variables are leveraged to extract economic or political concessions. This practice violates the principle of non-intervention, codified under Article 2(7) of the UN Charter and reinforced by customary international law. As theorised by Marko Milanovic and others, such measures may constitute "coercion-as-extortion", wherein economic leverage is deployed in a manner that is normatively illegitimate, legally unjustifiable, and institutionally corrosive.
There are a few larger concerns that will have long-term implications. First, trust, once broken, is hard to rebuild. Even if these tariffs are rolled back (as they were with China, from 145% to 42%), the memory of coercion lingers. India must prepare for a world where economic relations are transactional, weaponised, and deeply political. Second, now, there will be a lack of predictability in the tariff regime. There will now be a precedence of an approach that America has taken. Third, it will undermine India's 'China+1' opportunity. India, long viewed as a credible alternative, may now see investor hesitation.
How India Should Respond
India's policy response must operate on four axes: preservation, reform, diversification, and leverage creation. First, India must safeguard regulatory sovereignty in domains such as agriculture, data governance, and public health. These areas underpin social welfare and strategic autonomy, and must be rendered non-negotiable in trade discussions.
Second, India must accelerate competitiveness-enhancing reforms to reduce structural inefficiencies. Logistics costs, currently among the highest in the G20, must be rationalised through investments in multimodal transport infrastructure. Customs delays and port dwell times must be minimised via procedural digitisation and algorithmic risk profiling. These improvements would lower the marginal cost of export and enhance resilience to exogenous shocks.
Third, India must rapidly conclude preferential trade agreements (PTAs) with the European Union, United Kingdom, and Indo-Pacific partners. Market diversification is essential not only to mitigate overexposure to the US but also to position India as a stable alternative within a fragmented global trade map. Simultaneously, India must deepen supply chain integration within the Global South through bilateral rupee trade frameworks and regional production networks.
Reduce Dependence
Fourth, and most critically, India must now create strategic economic leverage. For too long, India has focused on minimising vulnerability without actively shaping dependency structures in its favour. This must change. India's dominance in global generics (supplying almost 50% of US drug volume), its emerging chip packaging capabilities, and its growing digital consumer base are all sources of latent leverage. These must be institutionalised through secure supply arrangements, bilateral investment treaties with conditionalities, and industrial policies that create technological chokepoints. Strategic autonomy will be credible only if India has something others cannot easily substitute or deny.
The current tariff episode reflects not a temporary disturbance but a deeper structural transformation in the global economic order. Sovereignty in this environment cannot be defended merely through procedural adherence or legal protest. India must read this moment clearly, not as a call for tactical retaliation, but as an inflexion point for institutionalising economic power. Strategic clarity, not reactive defensiveness, is the foundation for sovereignty in the 21st-century political economy.
[Aditya Sinha (@adityasinha004) writes on macroeconomic and geopolitical issues.]
Disclaimer: These are the personal opinions of the author
