US tariffs on India: sanctions or trade negotiations?
2 SEPT, 2025
By Jupiter AM
Authors: Avinash Vazirani and Colin Croft, managers of Jupiter India Select, Jupiter AM
The recent imposition of a 50% tariff on Indian exports to the United States has raised concerns across markets, partly due to public comments from US officials attempting to link it to India’s purchases of Russian oil.
However, we do not believe this is the real reason behind the decision. In fact, US officials have tacitly supported India’s continued purchases of discounted Russian crude over the past few years, in order to avoid the likely surge in fuel prices that would occur in the event of a real embargo on Russian oil exports, which account for around 5% of global demand.
India’s purchases of Russian oil are not in breach of sanctions and play a stabilising role in global energy markets.
Janet Yellen, former US Treasury Secretary and former Chair of the US Federal Reserve
The US understands India’s energy needs and its role in controlling oil prices.
Eric Garcetti, former US Ambassador to India
It is really curious. If you have a problem with India buying oil or refined products, then don’t buy them. Nobody is forcing you. But Europe buys them, the US buys them — so if you don’t like it, don’t buy it.
India’s Foreign Minister, S. Jaishankar
This underscores India’s position that its energy trade is legal and essential for global price stability.
The broader context reveals that Europe continues to import Russian LNG, and the US itself buys uranium and other minerals from Russia, whose imports have risen significantly in 2025 compared with previous years. These facts highlight the selective nature of sanctions and trade penalties, reinforcing the view that India’s Russian oil imports are not the real driver behind the tariff escalation.
A negotiating tactic, not a sanction
The tariffs are best understood as part of the US’s negotiating strategy, aimed at securing trade concessions from India, particularly concerning market access for agricultural products — a politically sensitive issue given that nearly two-thirds of Indians live in rural areas and around 45% of employment is concentrated in agriculture.
India will never compromise when it comes to protecting the interests of our farmers.
Narendra Modi, Prime Minister of India
India’s relatively high average tariff rates (12% compared with 2.2% in the US) and its refusal to reduce duties on agricultural and dairy products have made it a target for reciprocal trade measures. The newly announced sanctions, applied in two tranches of 25%, are expected to raise India’s effective tariff exposure to over 32%.
Limited effect on GDP
Although the new US tariffs will have some macroeconomic consequences, they are far from as dramatic as headlines suggest. According to CLSA, the 50% tariff could reduce India’s annual GDP growth by 60 basis points, or 36 basis points in FY2026. UBS estimates a slightly lower impact of 30–50 basis points.
This would still leave India with a growth rate of around 6%, well above that of most other large economies. India’s exports to the US represent just 2.2% of GDP, and many critical sectors such as pharmaceuticals, electronics and refined fuels (which the US continues to import from India) are currently exempt. Affected exports are unlikely to vanish completely; some products can be redirected to other markets, and in some cases absorbed by domestic consumers.
Government response: boosting domestic demand
India’s policy response has been swift and strategic. The government is accelerating the long-awaited GST reform, which will reduce the tax burden and stimulate consumption. The number of GST slabs will be cut, resulting in a simplified and more efficient system, lowering GST rates by 10 percentage points on key products such as cement, insurance, and certain durables. This could provide a significant consumer stimulus.
India will use this moment to deepen liberalisation and boost domestic demand.
Sanjeev Sanyal, Economic Advisor to the Prime Minister
The Reserve Bank of India is also expected to ease monetary policy, with forecasts pointing to a 25-basis point cut in the short term, in addition to the 100-basis point reduction already implemented since December 2024.
Sector impact and portfolio exposure
The tariffs disproportionately affect labour-intensive sectors such as textiles, jewellery, and industrial machinery. We believe that even the most affected companies will manage, as 40–65% of their revenues come from outside the US, and they can redirect some volume to alternative markets.
Tata Motors, one of our portfolio holdings, exports vehicles to the US through its UK subsidiary JLR under the UK–US trade deal, and is therefore not subject to the 50% tariff on Indian exports. Cable manufacturer RR Kabel stated in its latest earnings that only about 2.5% of revenue comes from US exports, while it is experiencing healthy growth in other markets.
If pharmaceutical tariffs are introduced, the US’s dependence on Indian manufacturers will make it difficult to find substitutes at comparable scale and cost — over 60% of generic tablets consumed in the US come from India. This suggests that any additional costs from new tariffs would most likely be borne by US importers and, ultimately, American patients through higher prices, rather than by Indian drug makers. However, Indian exporters may still need to absorb part of the burden, which could pressure profits. Indian pharma companies represent about 8% of our fund, limiting our exposure to this sector-specific risk.
On the domestic economy, where financials, consumer goods, and healthcare are key sectors, some secondary effects may arise. Export-oriented firms could face difficulties repaying bank loans if they cannot find new customers, and employees in such firms might struggle with personal loans or mortgages. We believe timely measures by the government and the central bank can help mitigate these risks by stimulating domestic demand and reducing borrowing costs.
Conclusion
The 50% tariff is clearly a less favourable outcome than the swift conclusion of a trade deal that had been widely expected. However, we see this as part of a US trade negotiation strategy rather than a sanction for buying Russian oil. The effects are manageable, and India is responding with reforms that should strengthen its domestic economy and long-term growth prospects.
While dramatic tariff headlines often unsettle market sentiment in the short term, they tend to exaggerate the likely impact on economic fundamentals. In our view, these situations can create opportunities for investors to buy growing Indian companies at attractive prices.
It’s a complicated relationship. President Trump and Prime Minister Modi have a very good relationship at the top level, but this is not just about Russian oil. This situation has many layers. Still, India is the world’s largest democracy, and the US is the world’s largest economy. In the end, I believe the two countries will come together.
Scott Bessent, US Treasury Secretary, 27 August 2025
