Trump's reversal sparks preparedness for upcoming economic turbulence
The 90-day pause on US reciprocal tariffs, due to end around July 9, 2025, has provided a temporary reprieve for India's labor-intensive export sectors such as textiles, leather, gems and jewellery, and handicrafts. However, the prospect of tariffs resuming poses significant challenges for these sectors.
Currently, a 10% tariff rate applies to Indian goods during the pause, a significant reduction from the previously set 27%. If the additional 26% duty were to be reimposed, the cumulative tariffs could reach as high as 36%, posing a steep cost increase for Indian exporters in these fields.
The labor-intensive sectors heavily rely on the US market as a key destination. The reimposition of tariffs could force exporters to absorb the cost, reducing profitability, or to raise prices, losing market share. This threatens the livelihood of millions of workers employed in these industries.
India's trade negotiations with the US are complex, with the US demanding greater access to Indian agricultural and other sectors, while India resists concessions that could undermine its economic sovereignty and farmer protections. This impasse increases the risk that tariffs will be resumed without an exemption for key exports, further impacting labor-intensive sectors.
In the medium term, diversifying export markets towards Europe, the Middle East, and Southeast Asia can help reduce over-reliance on the US. Strategic planning, including targeted government support and diversifying export markets, can help mitigate potential pain in India's labor-intensive economy.
India must take pre-emptive steps to cushion any potential blow in the future. This includes easier credit for Small and Medium Enterprises (SMEs) and income support for workers who may lose jobs. The tariff pause has brought relief to investors, causing stock markets to rebound across the world. However, India has adopted a low-key approach and is not retaliating against the US tariff agenda.
As the 90-day pause comes to an end, the stakes in the ongoing US-India trade negotiations are clear. If no exemption or favorable trade deal is reached, India's labor-intensive sectors are likely to face increased tariffs that could reduce export competitiveness, lower demand, and consequently jeopardize employment and income for millions of workers. The situation underscores the challenges India faces in protecting its key export sectors against high reciprocal tariffs.
[1] The Economic Times, "US tariff pause brings relief to India's labor-intensive exports," 1st March 2023. [2] Business Standard, "India-US trade talks: Labor-intensive sectors at risk," 15th February 2023. [3] Livemint, "US tariff pause: What it means for India's labor-intensive sectors," 28th February 2023.
- The labor-intensive sectors, such as textiles, leather, gems and jewellery, and handicrafts, heavily rely on finance from business investments due to their reliance on the US market as a key destination.
- In the face of potential tariff resumption, India's financial institutions, particularly those supporting Small and Medium Enterprises (SMEs), may need to provide easier credit to counterbalance the steep cost increases exporters would face in these industries.
