Just six months ago, in February 2025, prime minister Narendra Modi stood with the newly re-elected president Donald Trump at the White House, announcing their ambitious "Mission 500" – a target to more than double bilateral US-India trade to $500 billion by 2030. 

Today, that optimism has given way to harsh reality as India faces some of the highest tariffs imposed by the US on any trading partner, threatening $48.2 billion worth of exports and fundamentally undermining the economic partnership between the world's two largest democracies.

The timing of these tariffs is particularly jarring given India's recent stellar economic performance. The National Statistics Office reported that India's economy surged with an impressive 7.8% GDP growth in Q1 FY 2025-26, versus 6.5% in Q1 FY 2024-25, marking the fastest pace of expansion in five quarters and exceeding market expectations. This performance reinforced India's position as one of the world's fastest-growing major economies, powered by both the manufacturing and services sectors.

However, this momentum faces serious headwinds from the tariff regime. Three major financial institutions have revised their growth projections downward significantly. SBI Research estimates GDP growth could moderate to 6.3% for FY26, down from the original projection of 6.5%. HDFC Bank projects similar declines, with a downside projection of 40 basis points. Goldman Sachs projects an even more direct impact, estimating a 0.6 percentage point hit to India's GDP from the 50% tariffs.

The announcement of these tariffs has also impacted foreign investments and currency stability. Data from the Reserve Bank of India shows that net foreign direct investment (FDI) dropped 52% year-on-year in June 2025, falling to $1 billion from $2.2 billion in June 2024. Foreign institutional investor flows have turned volatile, with currency depreciation exacerbating capital flight risks in recent months.The Indian rupee has weakened dramatically in August 2025, with the USD/INR exchange rate rising to INR 88 / USD on August 29, declining 3% in 2025 since the tariff announcements.

The employment implications are catastrophic. Sectors that are being hardest hit by the tariffs, such as gems, jewellery, textiles, carpets, footwear, seafood and shrimp, engineering machinery, and chemicals are also amongst India’s most employment intensive.

MSMEs, accounting for 45% of India's total exports, bear the heaviest burden. MSMEs hold over 70% market share in textiles, gems and jewellery, and around 40% in chemicals – precisely the sectors most affected. These businesses, already constrained by limited access to credit and markets, find it nearly impossible to absorb sudden cost escalations or pivot quickly to alternative markets.

The textile and apparel sector, employing 45 million workers directly, faces the most severe disruption. With tariffs now reaching 63.9% on textile goods (13.9% prevailing tariffs and additional 50%), Indian exporters face insurmountable competitive disadvantages against countries like Bangladesh, Sri Lanka, Malaysia, and Vietnam, which face tariffs close to 20%.

Stories from large textile clusters like Tirupur which accounts for over 30% of India's readymade garment exports, exemplifies the scale of challenges. This cluster employs 800,000 workers, 60% of whom are women, and sends nearly 30% of its exports to the US. Recent reports from cluster representatives suggest that while buyers from the US expect manufacturers to absorb the entire cost of the tariffs, even other foreign buyers, sensing the inventory pile up, are asking for steep discounts – grossly violating their negotiated contracts. This is likely to impact the smallest suppliers and workers in the cluster. 

In gems and jewellery, Surat's diamond polishers, who dominate India's exports with over 80% market share, confront severe challenges. Diamonds constitute over half of India's total gems and jewellery exports, with the US accounting for nearly a third of shipments worth $12 billion annually. This threatens the employment of over 1 million workers in the cluster. 

The marine products sector faces tariffs reaching 58.26% on shrimp exports valued at $2.24 billion, with 40% destined for the US market. And this places the 9 million seafood and marine sector workers across clusters in Andhra Pradesh, Tamil Nadu, Gujarat, West Bengal and other coastal states in a precarious position.

Way Forward: Government Leadership is Critical
This unprecedented economic shock is the one situation which necessitates rapid and decisive action from the Government of India to protect Indian businesses and workers while building long-term resilience. It may consider five strategic interventions.

Emergency Working Capital Support
Deploy targeted emergency working capital loans, especially for MSMEs in affected sectors and industrial clusters. The government could direct banks to provide collateral-free lending and moratoriums on existing loan repayments for affected exporters. Quick liquiditythrough interest subvention schemes and export credit support can help businesses weather the initial shock and maintain operations while longer-term solutions are developed.

Export Market Diversification
Accelerate identification of new international markets through strengthened trade missions to Southeast Asia, the Middle East and Africa to reduce over-dependence on the US markets. 

Modi's recent visit to Japan and participation in the Shanghai Cooperation Organisation (SCO) Summit in Tianjin, China, provides an excellent foundation for trade diversification. India’s upcoming presidency of the BRICS group in 2026, which brings together eleven major emerging economies, representing half of the global population, around 40% of the global GDP and a quarter of global trade can also be leveraged for export market diversification.

The government's announced export promotion missions to over 40 countries must be fast-tracked, with industry participation to promote directlinkages to opportunities in these new markets.

Strategic Investment Partnerships & Joint Ventures
Incentivize Indian businesses to co-invest and create multinational joint ventures (JVs) with strategic partners to help secure long-term investments and create resilient supply chains. 

The recent launch of the E-Vitara project exemplifies this approach perfectly. On August 26, Modi flagged off Maruti Suzuki's first global strategic Battery Electric Vehicle, the "e-Vitara," from the Hansalpur plant in Gujarat. This Made-in-India EV will be exported to over 100 countries, including Japan and European markets, marking India as Suzuki's global manufacturing hub for electric vehicles. 

There is a need to enhance the establishment of more such JV facilities, including those with investments of Indian capital in strategic partner countries.

Global Value Chain Integration
Study emerging supply chain opportunities and actively support MSMEs to enter new global value chains. Focus on sectors where India can become a competitive manufacturing hub by leveraging the growing demand for supply chain diversification. Skill development programmes tailored to new market requirements and quality standards must be implemented immediately, ensuring Indian manufacturers can meet international specifications and compete effectively in global markets.

Trade Infrastructure Overhaul
Fast-track deregulation, improve trade facilitation infrastructure, and streamline trade processes. Reducing bureaucratic friction will enhance India's competitiveness in global markets. The proposed GST reforms, simplifying the current structure to 5% and 18% slabs, is likely to boost domestic consumption and create alternative demand sources. 

Digital infrastructure for export documentation and clearances also needs to be modernized to reduce logistics costs and processing times, enhancing India's overall export competitiveness and costs of doing business.

The US tariffs represent more than just a trade dispute – they fundamentally challenge India's export-led growth model and threaten millions of livelihoods. However, this crisis also presents an opportunity to build a more diversified, resilient economy less dependent on any single market. The time for decisive leadership and strategic action is now, and from the first response, it appears the Government of India is ready for this challenge.

Mitali Nikore is founder and chief economics of Nikore Associates. She advises multilateral organizations, governmentsand private sector agencies, and specializes in infrastructure development, gender economics, and policy design.