US Imposes 25% Tariffs on Indian Imports, Raising Investment Uncertainty

On Wednesday (30 July), US President Donald Trump announced a 25% tariff on Indian imports, along with “an unspecified penalty” for India’s purchases of Russian weapons and energy. The measures took effect today (1 August), marking the deadline for countries to reach trade agreements with the US before the previously announced “reciprocal” rates from April would be implemented.

India, which had been negotiating with the US for months over tariff rates, was initially considered a likely candidate for favorable treatment. US Vice-President JD Vance’s April visit to India and Trump’s cordial relationship with Indian Prime Minister Narendra Modi had fostered optimism that India might avoid the 27% tariff rate originally designated for the country.

The tariff implementation creates significant economic uncertainty for India, which has a GDP of nearly $4 trillion (Rs349.09 trillion). Shumita Sharma Deveshwar, chief India economist at GlobalData.TSLombard, explained to Investment Monitor that these measures could substantially impact India’s economy, which was already experiencing investment challenges.

“The private investment cycle in India has been sluggish. We have been waiting for a recovery for a while now,” said Deveshwar. “If you look at the foreign direct investment inflows, they have been disappointing compared to the kind of growth that we are seeing and the headlines saying that India’s the fastest-growing economy in the world.”

This situation presents a puzzling contradiction—why isn’t more investment flowing into India despite its strong economic growth? With the United States serving as India’s largest export destination, receiving approximately one-fifth of India’s merchandise exports, the new tariffs introduce additional complications into an already challenging investment landscape.

The uncertainty extends beyond just the tariff rate. Trump’s announcement of penalties related to India’s Russian oil and arms purchases adds another layer of complexity, though specific details remain unclear. These developments compound existing concerns about private investment in India’s economy.

“This just introduces a sense of uncertainty into what was already an uneven economic revival,” Deveshwar noted. “Now this extra level of uncertainty has been introduced because we don’t know what the final outcome is going to be.”

Negotiations between the two countries remain ongoing, with India still hoping to secure a more favorable arrangement by September-October. A US trade delegation is scheduled to visit India later in August. However, the current uncertainty may deter investors from taking risks while the final outcome remains unknown.

The sluggish private investment climate in India predates these tariff issues. Deveshwar points to several underlying factors, including what she describes as “policy complacency” in the current administration, which is now in its third term.

“The pace of reform has been going down over the years, and over the last one year there has hardly been any,” she explained. “India remains a country where the rules and regulations are not that easy, where there needs to be a lot of streamlining.”

Infrastructure limitations also pose significant challenges. Despite government efforts to develop road and railway networks, supply continues to lag behind demand, particularly in urban areas that are “bursting at the seams.” Additionally, companies consistently report shortages of skilled labor, despite India’s young and growing population.

Agricultural reform remains particularly contentious in US-India trade negotiations. The US has sought greater access to India’s agricultural sector, but this represents a “red line” for Indian negotiators. With approximately two-thirds of India’s population residing in rural areas and about half the workforce directly employed in agriculture, the sector carries enormous political significance.

“If you allow agricultural imports from a highly mechanized country, the impact that is going to have on farmers here is potentially huge and damaging to their livelihoods,” Deveshwar explained. While India imports certain agricultural products like edible oils, lentils, and some dry fruits, opening key sectors such as wheat or dairy to foreign competition could threaten millions of livelihoods.

Unlike recent US trade agreements with Japan, the European Union, and South Korea—which included investment pledges from those countries into the United States—a similar arrangement with India seems unlikely. Given India’s domestic investment needs and employment challenges, committing to significant overseas investment could send the wrong political message at home.

As both countries continue discussions, the global trade community watches closely to see whether a more favorable arrangement can be reached in the coming months.