Finance Ministry’s July 2025 Economic Review

Tariffs & Trade

• Tariff: Tax imposed on imports/exports → makes goods costlier, reduces competitiveness.
• Direct effect: Higher tariffs → costlier Indian exports in US → lower demand.
• Indirect/Secondary effect: Supply chain disruptions, reduced investment, job losses in export sectors.
• Tertiary effect: Slower growth in allied sectors (logistics, finance, services linked to exports).

Relevance : GS 2(International Relations) , GS 3(Indian Economy)

Immediate Context

• US action: Extra 15–20% tariff, potential 50% tariff on some Indian exports (Aug 2025).
• Sectors exempted: Pharmaceuticals, semiconductors, consumer electronics → soften the blow.
• India’s exports to US: ~2% of GDP.
• Exposure subject to tariffs: ~12% of India’s GDP (after exemptions).

Finance Ministry’s Key Observations

1. Immediate impact limited, but:
   1. Secondary & tertiary effects could hurt exports, capital formation, investor confidence.
2. Diversification Strategy:
   1. Recent FTAs: UK, EU.
   2. Ongoing negotiations: US, EU, New Zealand, Chile, Peru.
   3. Will take time to yield results.
3. Government’s Approach:
   1. “Government & private sector acting in tandem” can minimise disruption.
   2. Tariffs seen as a temporary setback → opportunity to strengthen resilience.
4. Global Credit Outlook:
   1. S&P upgraded India’s rating BB+ → BBB.
   2. Suggests India’s fundamentals are strong enough to absorb tariff shocks.

Risks Identified

• Short-term risks:
  • Export slowdown in high-value sectors (engineering goods, textiles, auto components).
  • Reduced capital formation (investment hesitancy due to uncertainty).
• Medium-term risks:
  • Supply chain disruptions.
  • Loss of competitiveness vis-à-vis Vietnam, Bangladesh, ASEAN (who enjoy lower US tariffs).
• Long-term risks:
  • Overdependence on US market (India’s largest trading partner).
  • Risk of being caught in US–China geopolitical rivalry.

Opportunities in Crisis

• Export Diversification: Shift to EU, UK, ASEAN, Africa, Latin America.
• Domestic Demand Push: Boosting “Make in India” for local consumption.
• Resilience-building: Policies to handle global shocks better (PLI, infra, digital push).
• Strategic Negotiation: Use tariff threat as leverage in India-US trade deal.

Global & Domestic Context

• Global backdrop: Rising protectionism (US, EU), weakening WTO dispute settlement.
• India’s positioning:
  • Dynamic among top 5 economies (growth ~6–6.5%).
  • Strengthened fiscal & external fundamentals → buffer against shocks.

Key Takeaways

• Direct hit limited: Only ~2% of GDP exposed directly.
• Secondary/tertiary risks matter: exports, investment, supply chains could slow.
• Mitigation: Diversification, policy agility, public-private cooperation.
• Big picture: India can turn tariff pressure into opportunity to push reforms, diversify trade, and accelerate domestic capacity-building.