Trump’s tariff may dent export margins, but India’s manufacturing appeal intact, say economists

India’s competitive labour market and favourable demographics remain strong pull factors

Economists and trade experts have allayed concerns over any long-term impact of US President Trump’s tariff and unspecified penalty on Indian exports, and said that even if the levies dent the short-term margins, New Delhi’s long-term advantages are intact, especially for companies evaluating a China+1 strategy in global manufacturing.

The penalty on India, linked to its energy and defence purchases from Russia, had sparked fresh concerns over the competitiveness of India’s exports and the future trajectory of global factory relocation into the country.

However, economists are of the view that Trump’s tariff regime is likely to act as a short-term deterrent rather than a structural disruption. India continues to offer compelling advantages - a large base of educated and cost-effective manpower, stable policy environment and government support through incentives and ongoing infrastructure improvement.

Government support could help sustain investor interest in factories relocating to India. Margins can be preserved if the Centre responds by reducing logistics costs, and offering targetted fiscal support - particularly to high-employment sectors - as global players weigh investment decisions with a 10–15 year horizons, said trade experts.

India’s Exports at Risk

“On factories moving to India, the high tariff implies an erosion of margins, especially where imports have higher sensitivity to changes in prices. The government can offset some of the losses by cutting logistics costs and offering fiscal support to sectors with high employment intensity,” Sujit Kumar, Chief Economist, NABFID told Moneycontrol.

He added that the 25 percent tariff, if implemented, could amount to $16-18 billion annually as duties on Indian exports based on FY25 US export volume of $86.5 billion. “Jewellery, textiles, phones and industrial machinery will see the bulk of the impact, given their high share in India's exports to the USA,” Sujit Kumar said. However, India’s long-term competitiveness is unlikely to be derailed, said experts.

“Trump tariff measures could be short-term deterrents while investment decisions are made considering long-term factors. Also, India provides many other advantages – mainly in terms of skills and educated, disciplined manpower at low cost – which would continue to attract global manufacturers to India. So, I don't see a medium to long-term impact on decisions of global companies moving to India after these tariff penalties,” Charan Singh, CEO of public policy think tank EGROW Foundation told Moneycontrol.

Charan Singh added that the tariff impact would be highest on gems and jewellery, machine equipment, textiles and auto components, while pharmaceuticals and energy remain exempt. He urged India to respond strategically by diversifying export destinations, explore the Global South, and strengthen trade ties with the 32 major nations to which Indian trade-focused delegations have recently been dispatched.

While some sectors face immediate challenges, India’s labour market dynamics and demographics remain key pull factors. “India’s competitive labour market and favourable demographics remain strong pull factors for manufacturers, especially as global players make investment decisions based on 10-15 year horizons,” economists said.

Policy Response

While the full scope of tariff impact will depend on bilateral talks, experts agree that India’s policy response - strategic incentives, trade diversification, and cost competitiveness - will be crucial in maintaining investor confidence and sustaining the manufacturing momentum.

Some fear that the US tariffs could have broader implications on India’s trade and industrial growth strategy.

“This is a serious setback for industries trying to relocate from China, and the China+1 policy will no longer be attractive to entrepreneurs,” economist Govinda Rao told Moneycontrol. “This will particularly hurt our labour-intensive enterprises in which we face acute competition. We need to reduce tariffs and non-tariff barriers for our own good. For the sake of protecting agriculture, which contributes just about 16-18 percent of gross value added, we cannot sink into non-competitiveness,” he warned.

Geopolitical Undercurrents

Govinda Rao stressed on the need to open up markets and make Indian agriculture more competitive. Some observers believe the secondary tariffs over India's energy ties with Russia are President Trump’s geopolitical tool, and unlikely to be permanent fixtures.

“Secondary tariffs are meant to be temporary. They are intended to effect a change in behaviour. In this case, it is about putting pressure on India to stop buying Russian oil,” Ricardo Hausmann, founder and Director of Harvard’s Growth Lab told Moneycontrol. “The 25 percent tariff is meant to be more permanent and hence more impactful on behaviour,” he added.

Despite the uncertainty over tariffs, India’s services exports continue to provide a cushion.

“India remains fairly placed to navigate the high tariff world as services remain key to India's export resilience,” NABFID’s Sujit Kumar said.