Experts urge for tariff-only talks after Trump's Russia penalty on India

PM Narendra Modi, US President Donald Trump

Talks over trade should be limited to tariffs, experts said after President Donald Trump imposed a massive 25 percent tariff on Indian goods along with a penalty for Russian energy and arms purchases putting India at a disadvantage against competitors.

While, Trump hasn't elaborated on the quantum of the penalty, trade experts say this could put Indian exports at a disadvantage to countries like Vietnam and Indonesia that have brokered trade deals, facing tariffs of 20 percent and 19 percent, respectively.

"A 25-tariff percent plus a penalty puts us at a disadvantage to the likes of Indonesia, and Vietnam, depending on the penalty. India could be at a disadvantage against countries like Bangladesh and Sri Lanka if the penalty is too high. The price squeeze from the customers will be very sharp," says Israr Ahmed, former Vice President of Federation of Indian Export Organizations (FIEO).

EEPC Chairman Pankaj Chadha says issues that are not related to trade are being used to justify higher tariffs. "We should talk of trade and trade only and only on a reciprocal basis. Our buying of Russian energy and arms cannot be used to penalise us for trade," Chadha added.

Trump on July 30 took to Truth Social to say, "also (India), they have always bought a vast majority of their military equipment from Russia, and are Russia’s largest buyer of ENERGY, along with China, at a time when everyone wants Russia to STOP THE KILLING IN UKRAINE — ALL THINGS NOT GOOD!"

"India is committed to buying arms and oil at the cheapest price wherever it gets it from. It is not just about arms and energy; it is about Make in India. Today’s India is not the same as it was 30 years ago, we are emerging as a global power in arms production, we had demonstrated to the world we are the best during Operation Sindoor," said Ashwani Mahajan, National Co-Convener of Swadeshi Jagaran Manch (SJM).

India’s defence imports from Russia have already dropped from 76 percent in 2009 to just 36 percent in 2024, according to the Stockholm International Peace Research Institute (SIPRI).

However, when it comes to crude oil, Russia remains the largest supplier for India roughly accounting for 40 percent of total imports in this category.

Ahmed says even if the penalty is at 10 percent, all sectors will be dramatically impacted, including our labour-intensive sectors such as textiles, leather and footwear.

He explains that in case the penalty is 10 percent, even with European Union, India is looking at a 20-percent differential. "Indonesia will benefit quite a lot, because they have the labour, it is a low-cost nation."

The US has imposed a tariff of 15 percent on EU goods after brokering a tentative trade deal.

To be sure, some of India’s top exports to the US including around $14 billion in electronics products in FY25, $10.5 billion in drugs and pharmaceuticals and petroleum worth $4.09 billion are exempted from Trump's tariffs. Though, it not immediately clear if the 25 percent tariff plus penalty will be applicable to these sectors as well.

Trump has threatened tariffs as high as 200 percent on foreign-made drugs, but this category remains exempted so far from his reciprocal duties. In fact, in his recently brokered trade deal with the European Union, the US agreed to levy only 15 percent on this category.

To deal or not?

While India and the US have been negotiating a first tranche of a Bilateral Trade Agreement (BTA) aimed at fall of this year, efforts to agree on a mini-version by August 1 to avoid steeper reciprocal tariffs have seemingly failed.

Negotiators from the American team are expected to visit New Delhi for another round of talks only in the middle of next month.

While, experts are against expanding trade talks beyond tariffs, they highlight the need for a trade deal with the US as well.

EEPC's Chadha said arms and energy purchases seem to be at the core of these tariffs.

"We are under negotiations and this is unfortunate, exporters need more clarity on the penalty," Chadha added.

Ahmed says given the latest developments, India needs to do a trade deal with the US now more than ever.

"Even China has reached an understanding with the US. This will be a blow for Indian exports to the US and therefore this situation should be quickly reversed as soon as possible.

After an understanding, the US has imposed a 30 percent tariff on China, sharply lower than the 145 percent threatened back in April. This truce will last till August 12 and is likely to be extended further.

Exporters had earlier seen an edge on textiles and apparel exports, given a steeper 35 percent tariff on Bangladesh, however the threat of a penalty over 25 percent tariffs changes things.

India exported ready-made garments worth $5.33 billion to the US in FY25.

Gems and jewellery, another key export to the US at nearly $10 billion in FY25 may also see an impact, especially in the low-cost categories due to steeper tariffs.

“Low-cost gold jewellery will be severely impacted because of steeper tariffs and since not much labour is needed," GTRI's founder Ajay Srivastava says.

Mahajan too says that India has to keep on talking for a trade deal, "by sitting on the table and deciding on a deal on equal terms."

India exported goods worth $86.51 billion to the US in FY25.

It was in February, when India and the US set a bold new goal for bilateral trade – "Mission 500” – aiming to more than double it to $500 billion by 2030.

Since then, both nations have held five rounds of talks to agree to a trade deal as part of this mission. But, divergences remain, especially on agriculture and dairy.

As EEPC's Chadha says, "talks should be limited to trade and tariffs."