Donald Trump’s sweeping 50% tariffs on Indian goods have officially taken effect, weeks after the U.S. president signed an executive order imposing an additional 25% penalty over India’s continued purchases of Russian oil and weapons. The decision makes India one of the countries facing the highest tariff rates globally, despite being a major U.S. partner in the Indo-Pacific.
Analysts warn the tariffs could severely undermine India’s export-driven economy. Until recently, the United States was India’s largest trading partner, and the new barriers threaten millions of livelihoods across sectors ranging from textiles and diamonds to seafood.
The setback has forced Prime Minister Narendra Modi’s government into crisis management, with new tax relief measures and renewed calls for economic self-reliance.
Earlier this month, Modi promised a “massive tax bonanza” for ordinary citizens and small businesses to cushion the blow. Speaking during Independence Day celebrations at Delhi’s Red Fort, dressed in a bright saffron turban, he urged shop owners to display “Swadeshi” or “Made in India” signs outside their stores. “We should become self-reliant – not out of desperation, but out of pride,” he said, arguing that global economic selfishness required India to rise above external pressures.
The prime minister has since repeated his message in multiple speeches, positioning domestic resilience as the answer to Trump’s trade squeeze. But while India’s manufacturing share of GDP remains stuck at around 15% despite years of subsidies and production incentives, tax reform could offer more immediate relief.
Following a $12 billion income tax cut announced earlier this year, Modi is now pushing for an overhaul of India’s goods and services tax (GST). Introduced eight years ago to replace a maze of indirect taxes, GST has been criticized for its complexity and multiple exemptions. The finance ministry has proposed a simplified two-tier system, which analysts say could add up to $20 billion in stimulus.
Brokerage house Jeffries noted that the combination of income tax reductions and GST reforms could provide a meaningful push to consumption, which accounts for nearly 60% of India’s GDP. Rural spending remains relatively strong thanks to bumper harvests, but urban demand has slowed amid job cuts and stagnant wages in key sectors such as IT.
Morgan Stanley analysts argue that the fiscal stimulus should help lift GDP while easing inflationary pressures, especially as India faces global trade headwinds. Consumer-facing industries, including scooters, small cars, garments, and cement, are expected to benefit most, particularly as festive demand peaks around Diwali.
UBS investment bank added that GST cuts would have a larger multiplier effect than past corporate or income tax breaks, as they directly lower costs for consumers at the point of purchase. This could spur spending across a wider base of the population.
Meanwhile, India’s central bank has already slashed interest rates by 1% in recent months and may act further if tax cuts boost liquidity. Government employees are also set to receive salary increases next year, further supporting demand.
Despite trade uncertainty, India’s stock markets have responded positively to Modi’s announcements. Earlier this month, the country also secured a rare sovereign rating upgrade from S&P Global, the first in 18 years, which could reduce borrowing costs and attract foreign investment.
Still, India’s growth has slowed from 8% highs in recent years, and its trade conflict with Washington shows no signs of easing. Scheduled negotiations were canceled after Trump’s tariff move, while disagreements over India’s energy ties with Russia continue to inflame tensions.
Experts warn that at 50%, the U.S. tariffs on Indian goods function almost like sanctions on trade between two of the world’s largest economies, a scenario that would have seemed unimaginable just months ago.
