US Tariff Escalation and Global Volatility

The imposition of 25% tariffs by the United States on Indian exports and the backdrop of global economic volatility have posed significant short-term trade and monetary policy challenges for India.

Trade and Tariff-Linked Disruptions

• US Tariffs Impact Export Composition:The newly imposed 25% tariffs affect Indian exports like textiles, chemicals, pharmaceuticals, and auto components, which together form a critical segment of India’s export basket contributing over 2% of GDP.
• Supply Chain and Employment Shock:The estimated cost of these tariffs may reach $30 billion, negatively influencing employment, supply chains, and GDP momentum, particularly in the short term.
• Energy Diversification amid Geopolitical Shifts:India has diversified its energy imports—Russian crude oil imports rose from 2% (FY22) to 36% (FY25)—and is now tapping LNG and US crude, aiming to convert supply risks into strategic resilience.

Financial Market Sensitivity and Policy Response

• Foreign Capital Outflows Intensify Pressure:In July 2025, foreign portfolio investors withdrew $1.4 billion, weakening the Rupee by nearly 2%, signaling investor apprehension amidst global uncertainty.
• RBI’s Balancing Act on Inflation and Stability:The RBI faces a trade-off—with inflation projected around 5%, rate cuts must be managed cautiously to avoid exacerbating capital outflows and exchange rate volatility.
• Currency Depreciation Complicates Policy:A weaker rupee increases the import bill, affects policy transmission, and amplifies monetary tightening dilemmas for the central bank.

Strategic Pragmatism and Sectoral Resilience

• Defence and Technology Autonomy Sought:Despite continued defence imports from Russia, India is incrementally pursuing domestic production and Make in India initiatives to reduce strategic dependency.
• Resilient Sectors Counterbalance External Shocks:Sectors such as financial services, consumer goods, and technology exports remain insulated from global volatility and continue to perform robustly.
• Need for Tactical Economic Diplomacy:India’s approach emphasizes smart bargaining over symbolic deals, advocating for structural relief across agriculture, defence, and tech markets while countering protectionist trends from nations like the US, EU, and UK.

PracticeQuestion:

In light of the escalating global trade tensions and unilateral tariff measures by major economies, critically examine how India can balance its external sector vulnerabilities with its long-term objective of strategic economic autonomy. Illustrate with examples from recent trade and energy diversification decisions.    (250 words)