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On July 30, 2025, U.S. President Donald Trump announced, via his platform Truth Social, a sweeping 25% tariff on Indian exports to the United States, effective August 1. Citing India’s alleged “obnoxious” trade practices, elevated tariff barriers, and its continued imports of oil and defence equipment from Russia, the announcement was characteristically blunt and unilateral.
While the stated reasons echo past rhetoric, a closer reading suggests that this action is part of a broader pressure tactic aimed at compelling India to open its domestic markets—particularly agriculture and dairy—to greater U.S. penetration. These sectors have historically remained sensitive due to a combination of economic, cultural, and socio-political considerations.
India’s dairy industry, for instance, supports over 80 million rural households, many of them marginal farmers or women-led cooperative members. Likewise, India’s Agri-import policies prioritise food security, local procurement, and protection from volatility in global prices. In this context, any forced liberalisation would disproportionately harm India’s most vulnerable rural constituents and runs contrary to India’s food safety norms and cultural values.
Quantifying the Exposure: Contextualising the Tariff Impact
India exported approximately USD 90 billion worth of goods to the United States in FY 2024–25, representing roughly 11% of India’s total exports and around 2% of its GDP. The U.S. remains India’s largest single-country export market, but the composition of India’s export basket has significantly diversified over recent years.
While the newly announced tariffs may adversely affect certain traditional sectors such as textiles, leather, and low-end engineering goods, these are no longer the most strategically significant export categories. India’s current export competitiveness increasingly lies in sectors such as semiconductors, active pharmaceutical ingredients (APIs), clean energy components, electric vehicle sub-assemblies, and digital services—all of which enjoy either higher global demand elasticity or are subject to bilateral or multilateral regulatory coordination.
Consequently, while the tariff hike carries geo-political undertones, its real economic consequence may be relatively subdued. Nonetheless, allowing such a measure to go unaddressed could set an adverse precedent and may erode India’s bargaining position in future trade negotiations. Therefore, an appropriate response is necessary—but one that is nuanced, proportionate, and strategically deployed.
Nuanced Policy Levers, Not Knee Jerk Tariff Retaliation
The move has both symbolic and strategic implications, but its actual economic impact on India remains modest. Given the political theatrics that often accompany such declarations, India’s response must not be emotionally driven or reactionary. Instead, it should be anchored in measured, rules-based, and calibrated policy instruments that serve India’s long-term trade and strategic interests without undermining its credibility as a responsible stakeholder in the global trading system.
Instead of knee-jerk tariff retaliation, India can respond using nuanced policy levers- from quality control and certification norms to revisiting Equalisation levy- what one might call a 'Chanakyan' approach wrapped in WTO-compliant paperwork.
Direct tariff retaliation may seem intuitively appealing but carries multiple risks: it fuels a tit-for-tat escalation, disrupts existing supply chains, invites WTO scrutiny, and sends adverse signals to investors. Instead, India can—and should—exercise its discretion through a spectrum of non-tariff regulatory instruments that are both compliant with international obligations and effective in asserting policy leverage. Some of these are discussed below.
i. Digital Economy and Tax Sovereignty: Revisiting the Equalisation Levy
A critical diplomacy domain wherein India can assert its economic sovereignty is digital taxation. India’s Equalisation Levy was introduced in two distinct phases to tax the digital economy. Phase 1, launched in Budget 2016, imposed a 6% levy on payments exceeding ₹1 lakh per annum made by Indian businesses to non-resident entities for online advertisements or related services. This was targeted primarily at tech giants earning ad revenue from Indian users without a physical presence here. Later, Phase 2 of the Equalisation Levy was introduced in Budget 2020, effective from April 1, 2020, which expanded the scope to include a 2% levy on e-commerce operators (non-resident digital platforms) supplying goods or services to Indian customers. However, this levy came under intense global scrutiny, particularly from the United States, prompting trade tensions. As a result of bilateral negotiations, Budget 2024 (full budget presented in July 2024) announced the suspension of the 2% Equalisation Levy on e-commerce supply or services. Recently, Budget 2025 announced the scrapping of phase 1 Equalisation Levy of 6% on advertisement revenue, as part of India’s commitment under the OECD-G20 global tax framework.
President Trump's tariff tirade gives India a renewed reason to reconsider or recalibrate this levy. Given that U.S.-based digital multinationals continue to earn substantial advertising, subscription, and platform-based revenues from India—often without permanent establishment status—India may consider reinstating or expanding the scope of the Equalisation Levy. Such a measure can signal sovereign intent and generate revenues without provoking WTO censure, provided it is structured to align with principles under the OECD Inclusive Framework.
ii. Agricultural Imports: Regulatory Rigour within WTO Frameworks
A classic example is agricultural imports from the United States, especially high-volume, high-margin products like California almonds. Rather than increasing import duties, India could intensify enforcement of its existing sanitary and phytosanitary (SPS) standards. Testing for aflatoxins, pesticide residues, or mycotoxins can be carried out more rigorously under FSSAI protocols. This approach is compliant with WTO rules under the Agreement on the Application of Sanitary and Phytosanitary Measures and sends a calibrated message on regulatory parity.
iii. Automobiles: Technical Barriers to Trade (TBT) as Policy Instruments
High-end motorcycles such as Harley-Davidsons have long been emblematic of U.S. concerns on Indian tariffs. India may consider mandating compliance with more stringent vehicular emission standards, local assembly requirements, or noise and safety certifications under its domestic Motor Vehicles Rules and Central Pollution Control Board norms. These policy adjustments fall squarely within India’s sovereign regulatory space under the WTO’s Technical Barriers to Trade (TBT) Agreement.
iv. Gems and Jewellery: Leveraging Ethical Sourcing Protocols
India is a global leader in the processing and export of cut and polished diamonds and high-end jewellery—segments critical to the U.S. luxury market. Without targeting specific geographies, India can introduce enhanced requirements on ethical sourcing, traceability, and ESG (Environmental, Social, and Governance) disclosures. For example, a domestic certification mechanism in line with OECD Due Diligence Guidance could be instituted, thereby increasing compliance complexity for global luxury brands that rely on Indian value addition.
v. Value Chain Diplomacy: India’s Quiet Leverage
India’s increasing centrality in several global value chains presents an underappreciated yet powerful dimension of trade diplomacy. Rather than reactive retaliation, India should consider policy signalling through value chain interdependence. India may take a leaf out of China’s trade negotiations playbook. China restricted rare earth exports and sent global tech firms into mild cardiac arrest. India doesn’t have rare earths. But it does have rare influence and capabilities—in sectors where it’s now too important to ignore.
a. Pharmaceuticals: The Compliance Contingency
Over 40% of generic pharmaceutical products consumed in the U.S. originate from Indian manufacturers. While India need not issue any public threat, it may simply underscore the regulatory workload involved in FDA certification, Good Manufacturing Practice (GMP) compliance, and quality audits. Delays in batch clearance or re-inspection—when framed as procedural exigencies—can exert meaningful pressure without overt politicisation.
b. Information Technology Services: Administrative Complexity as Leverage
India’s IT sector plays a foundational role in the functioning of U.S. healthcare, banking, and retail technology infrastructure. Introducing enhanced compliance protocols for cross-border data processing, revising pricing structures in inter-company agreements, or undertaking stricter foreign exchange compliance reviews can introduce soft frictions. These would remain well within India’s regulatory domain while reinforcing its indispensability in the digital economy.
Avoiding overt references to the U.S. or retaliatory motivations preserves India’s international standing, prevents WTO litigation, and underscores its maturity as a global economic power. The guiding principle should be policy sophistication, not political symbolism.
vi. Accelerating Diversification and Multilateral Trade Alignment
Beyond defensive strategies, India must continue with proactive trade diversification. The Free Trade Agreements (FTAs) signed with the UAE and Australia have already demonstrated tangible gains in market access and investment flows. The recently signed trade deal with UK reinforces India’s pivot towards resilient, multi-regional value chains. It is now imperative to finalise the long-pending EU–India Trade and Investment Agreement and deepen India’s commercial engagements with ASEAN, Africa, and Latin America.
Equally important is India’s leadership in multilateral forums such as the WTO, G20, and BRICS, where coordinated resistance to unilateral tariff actions can be framed as preserving the integrity of global trade architecture.
Conclusion: Calibrated Assertiveness over Reactive Retaliation
President Trump’s tariff move appears to be a blend of political posturing and economic coercion. However, India need not—and should not—respond in kind. Instead, a portfolio of well-crafted, WTO-consistent policy instruments can signal resolve without triggering escalation. These include enhanced regulatory scrutiny, reactivation of digital taxation measures, and selective assertion of value chain leverage—all under the garb of domestic policy rationalisation.
This approach balances firmness with finesse. It signals that India will not tolerate arbitrary trade actions but will respond in a manner befitting a rising global power: legally, proportionately, and strategically.
In international trade, the quiet assertion of regulatory sovereignty often accomplishes more than the loud clang of retaliatory tariffs. India must resist the temptation of the sledgehammer. It is time to reach for the scalpel.
