50% Tariff on India: a smart move or strategic miscalculation?

President Trump's decision to impose a 50% tariff on India, the world's largest democracy, has led to significant strain in the relationship. The initial 25% tariff was a response to the trade deficit favouring India, as the Trump administration pushed for lower tariffs on American goods. When India's response to these demands was considered lukewarm, the U.S. raised the tariff to 50% as a punitive measure for India's continued purchase of discounted Russian oil, which the U.S. considers a way of financing Russia's war.

Data: CMIE & Reuters

The tariffs are threatening the credibility of a relationship that has been carefully built over two decades. The U.S. Congressional Research Service (CRS) has publicly warned that this move is "shredding the credibility" of the partnership. India, for its part, has not taken any retaliatory action nor has it bowed to U.S. pressure. Prime Minister Modi stated that India is prepared to pay a heavy price for its stance.

The economic fallout for India is significant. Labour-intensive sectors such as textiles, gems, jewellery, and seafood have been particularly hit hard, which directly impacts the rural economy, a key focus of Mr Modi's economic policy. In response, the Indian government has announced it will explore measures to support the affected industries and is looking to diversify its trade relationships.

Despite the tariffs, India's economy has reportedly maintained a robust growth of over 7%, while the equivalent for Western economies has remained in the lower single digits. As the one-sided tariff war escalated, India made a dramatic diplomatic move that the Trump administration likely did not anticipate. The Indian Prime Minister visited China for the first time in seven years, and in a joint statement, he and Chinese President Xi Jinping emphasized that they are "development partners, not rivals." This shift is seen as the U.S. tariff policy unintentionally accelerating a strategic thaw between the two Asian giants.

The issue shows no signs of resolution as both sides are sticking to their positions. In the context of global crude oil supply, the status quo is expected to remain unchanged. China has never stopped buying Russian oil, and India has made it clear that it will continue to do so. Since China and India are the world's top crude oil importers, analysts are confident that the supply would remain stable. This presents a challenge for the United States, which, despite being the world's top producer, is concerned about inflation and cannot afford to see oil prices rise.