The Economic Impact of Trump Tariffs on India's Export Sectors: Analyzing Vulnerabilities and Long-term Consequences

Geopolitical shifts frequently disrupt economic relationships, compelling nations worldwide to reassess policy priorities for continued growth. India currently faces this challenge with its key trade partner, the United States of America.

India's export sectors are confronting significant challenges due to the current American administration's policies. The informal economy, which employs over 80% of India's workforce, is particularly vulnerable to increasing trade barriers with the US. The bilateral trade between these nations stands at $131.84 billion, with the US accounting for approximately 18% of India's total goods exports. Recent US tariffs threaten to worsen the structural vulnerabilities inherent in India's informal and labor-intensive sectors.

Despite India's macroeconomic resilience, with Q1 FY26 GDP reaching a five-quarter high of 7.8%, the microeconomic reality reveals concerning trends. The informal sector, employing over 400 million workers, is contracting. Employment in informal manufacturing fell 9.3% in April-June compared to January-March, causing a 2.1% reduction in overall informal sector employment to 12.86 crore. During this period, the number of enterprises decreased by 4.7%. While headline growth figures appear robust, India's informal sector remains highly susceptible to external shocks.

The Ambur-Ranipet leather industry exemplifies these impacts. Following Trump's implementation of 50% tariffs on Indian goods, over 50 of approximately 300 factories in Ambur have closed. India's leather goods and non-leather footwear exports reached $4.4 billion in 2024-25, with $1 billion directed to the United States alone. The consequences are tangible: P. Gopi, a 42-year-old cutting machine operator who earned Rs 450 daily at Farida Leather Factory, can no longer afford his daughters' nursing education fees.

The 50% tariff has severely impacted India's leather industry. While factories exporting to Europe (which faces a 20% tariff) continue operations, those serving the US market are shuttering or planning to close. Some tanneries are relocating to Vietnam and Bangladesh, where tariffs are significantly lower at around 20%.

Tiruppur, responsible for over 60% of India's knitwear exports and a major supplier to the US market, faces similar challenges. A cumulative tariff of 64% substantially reduces the competitiveness of its products compared to those from countries like Bangladesh, which face tariffs of approximately 35%.

These tariffs, combined with structural weaknesses such as limited access to formal financing, prevent businesses from effectively scaling, investing, or managing shocks within the global economy and supply chain, placing the informal sector in a vulnerable position.

The US trade barriers will create excess inventories and production stoppages, reducing domestic activity and forcing labor-intensive, low-margin sectors to relocate to countries with lower tariff rates. Reduced wages and slowed employment growth will decrease household consumption, while surplus goods may distort domestic pricing.

V. Anantha Nageswaran, Chief Economic Adviser to the Government of India, estimated that Trump's tariffs could reduce India's GDP growth by 0.5% to 0.6%. However, this forecast preceded the announcement of pharmaceutical tariffs, which disproportionately affect one of India's most competitive global sectors. All sectors will experience impacts, with export-oriented industries suffering the most severe consequences.

India's export data demonstrates why these measures are particularly damaging. The top ten sectors represent nearly 69% of India's total exports to the United States, concentrating the impact of American tariffs on specific industries. Two sectors are especially vulnerable.

The electrical and electronic equipment sector, constituting 15.5% of total exports, places India as a leader in assembly and components exports. Tariffs in this sector threaten to undermine "Make in India" initiatives just as production-linked incentives were beginning to yield results.

The labor-intensive gems and precious stones sector accounts for 11.5% of India's exports and is highly vulnerable due to thin profit margins. Even minor price disadvantages render Indian exports uncompetitive in American markets. Workshops in Gujarat, employing 8-10 lakh workers across nearly 600 diamond polishing units, have reportedly begun reducing working hours and freezing recruitment.

The United States imports nearly $10 billion worth of cut and polished diamonds annually from India, representing almost 30% of global trade in this segment. Washington's sharp tariff increases directly threaten India's polished diamond exports, creating a systemic shock throughout the value chain. Given the industry's narrow operating margins, these tariffs risk rendering the sector uncompetitive in the US market, endangering the livelihoods of lakhs of families dependent on diamond polishing.

Other sectors like machinery (8.2% of total exports), iron and steel (3.7%), and vehicles (3.3%) are more capital-intensive and partially protected by domestic demand, but their export orientation leaves them exposed to Trump's tariffs. Meanwhile, labor-intensive sectors such as textiles and apparel (6.9% combined share of total exports) threaten millions of informal sector jobs in manufacturing hubs like Tiruppur and Ludhiana.

At a granular level, labor-intensive industries including gems, textiles, and apparel will bear the heaviest employment impacts, while high-value sectors such as pharmaceuticals and electronics face long-term competitiveness challenges.

The US tariffs highlight the vulnerability of India's export-dependent informal sectors and their human cost. Structural gaps in India's informal economy—particularly limited financing access, low productivity, and scaling difficulties—amplify the impact of these external barriers, transforming trade disruption into a systemic challenge for millions of workers. Without export market diversification, addressing financing gaps, and reconsidering India's comparative advantages, these shocks may translate into widespread economic and social distress with long-term consequences.

(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