India’s $7B Problem: Fallout New U.S. Tariffs

Impact of U.S. 26% Tariff on Indian Imports: A Sector-by-Sector Analysis

Published: April 2, 2025

The U.S. government’s decision to impose a 26% tariff on Indian imports, effective April 2, 2025, threatens to reshape India’s export-driven industries. This analysis explores the ripple effects across key sectors—aviation, pharmaceuticals, textiles, gems and jewellery, automotive, and electronics—while assessing broader economic consequences and potential mitigation strategies.

1. Indian Aviation: Rising Costs and Supply Chain Strain

Though not a major direct exporter to the U.S., India’s aviation sector will feel indirect pressure from the tariff due to its reliance on U.S.-made aircraft parts and services.

Key Challenges:

• Higher Financing Costs: A weaker Indian rupee (INR), potentially sliding to 85-87 against the USD due to reduced export revenue, could raise dollar-denominated lease and loan expenses. For airlines like IndiGo and Air India, this might increase financing costs by 2-5%, adding millions annually. U.S. lessors could also raise lease rates by 3-5%, boosting per-aircraft payments by $15,000-$25,000 monthly.
• Maintenance Cost Surge: If India retaliates with tariffs on U.S. aviation imports (e.g., Boeing parts, GE engines), maintenance, repair, and overhaul (MRO) costs could rise by 10-15%. A $3 million engine overhaul might incur an additional $600,000-$900,000 in duties. Supply chain disruptions could extend aircraft downtime, costing $100,000 daily per grounded plane.
• Limited Alternatives: Most Indian fleets rely on Boeing and Airbus (often with U.S. engines), so shifting suppliers is impractical. Stockpiling parts could add $2.6 million in tariff-related costs to a $10 million inventory.

Silver Lining: The tariff could accelerate India’s “Make in India” initiative, fostering domestic MRO and component manufacturing—though benefits will take years to materialize.

2. Key Export Sectors Under Pressure

The tariff directly threatens industries that rely heavily on the U.S. market, with billions in annual exports at stake.

• Pharmaceuticals: India’s $12.7 billion U.S. generic drug market (supplying nearly 50% of U.S. generics) faces margin squeezes for companies like Sun Pharma and Cipla. Higher costs could shift demand to competitors or alternative markets like the EU and Africa.
• Textiles & Apparel: With $4.7 billion in U.S. exports (2023-24), India risks losing ground to Bangladesh and Vietnam, which face lower tariffs. Job losses loom in textile hubs like Gujarat and Tamil Nadu.
• Gems & Jewellery: The $9.9 billion U.S. market may see reduced demand as higher prices favour domestic U.S. jewellers or other exporters.
• Automotive & Steel: Already hit by a 25% U.S. steel tariff, the new 26% duty could devastate auto parts exports. Small and medium enterprises (SMEs) face order cancellations and layoffs.
• Electronics & IT Hardware: Emerging exports like semiconductors and smartphones could lose competitiveness to Taiwan and Vietnam, potentially slowing U.S. tech investments in India.

3. Broader Economic Fallout

The tariff’s ripple effects extend beyond individual sectors:

• Export and GDP Hit: A $2-7 billion annual export decline could shave 0.24-0.72% off India’s GDP growth.
• Rupee and Inflation Risks: Reduced dollar inflows may weaken the INR, raising fuel and import costs and fueling inflation.
• Trade War Threat: India might retaliate with tariffs on U.S. goods (e.g., almonds, machinery), escalating tensions.
• Diversification Potential: India could pivot to the EU, ASEAN, and African markets to offset losses.

4. Mitigation Strategies

India has options to cushion the blow:

• Trade Negotiations: A U.S.-India deal by late 2025 could exempt critical sectors like pharmaceuticals and aviation.
• Domestic Manufacturing Boost: A “Make in India” 2.0 push could target electronics, aviation parts, and pharmaceutical ingredients.
• New Markets: Expanding trade with Europe, the Middle East, and Africa could reduce U.S. reliance.

5. Conclusion: A Pivotal Moment

The 26% U.S. tariff poses immediate challenges for India’s export giants—pharmaceuticals, textiles, and automotive—while aviation grapples with rising costs. The long-term outlook depends on India’s retaliatory stance, trade negotiation outcomes, and ability to diversify markets. As of April 2025, industries await final tariff details and policy responses. Strategic adaptation will be key to minimizing damage and seizing new opportunities.