Resilience In Times Of Uncertainty: How India Navigates Tariff Whirlwinds With FTAs, Domestic Push

This uncertainty has given a tariff shock to India’s exporters at a time when the domestic economy is on a revival path. Yet the outlook remains better than had been expected in the face of the U.S. decision to hike tariffs to 50 per cent for the country.

There are several reasons for this relative resilience.

Trade Pacts

One is the raft of free trade agreements (FTAs) that have either been concluded or are on the anvil, ensuring that Indian goods will continue to find relatively easy access in alternative regions. Trade pacts have already been concluded with large markets like the UAE and the UK. The trade agreement signed last year with the four-nation European Free Trade Area (EFTA) is also now coming into effect. 

This is at the same time that the talks on the long-awaited FTA with the EU have been put on the fast track. It is on the verge of being concluded by the end of this year. This could well give a stimulus to export growth, given the size of India-EU trade flows. The importance of this trade pact must be viewed in the light of the fact that bilateral goods trade with the EU is about 137.5 billion dollars annually, compared to 131.8  billion dollars with the US. Thus, the EU is India’s biggest trading partner, and an FTA could yield enormous benefits for the economy. 

Focus On The Domestic Economy

Another reason for the economic outlook remaining relatively benign is the fact that India is still not at the high table of global trade. It only accounts for a minuscule two per cent of world trade compared to 12 per cent for China and 10 per cent for the US. This failure to expand on the export front has been a matter of concern in the past, but is now seen as a positive outcome. The domestic-oriented nature of the economy is providing a cushion at a time of extreme stress on the tariff front. While there continues to be a need to explore alternative markets to soften the blow of the US tariffs, the situation is nowhere near an economic crisis.

In fact, the latest round of measures to boost consumption by cutting GST rates, as well as the easier credit norms announced by the central bank, is likely to provide a medium-term stimulus to the economy.  

As far as total exports are concerned, these rose only marginally in FY 2025 to reach 437 billion dollars. Growth picked up slightly during the period from April to August this year, with exports rising by about 2.5 per cent to reach 184 billion dollars. Some of this increase must be attributed to front-loading of exports to the US, in a bid to beat the August deadline for higher tariffs.

The tepid goods exports have been compensated by the buoyancy in services exports. The combined goods and services exports have reached a record level of  825 billion dollars in FY25. Merchandise exports may have failed to rise rapidly enough to bring India into the league of major trading nations, but this has actually insulated India from the new US tariff policies. It is the domestic focus that has prompted global investment agencies to retain the growth projections for 2025 at around 6.5 per cent. The reliance on the internal economy was taken into account by S&P Global Ratings when it upgraded India’s long-term sovereign credit rating to BBB from BBB- after 18 years in August.

Dominance Of Domestic Demand

Among the many factors cited for the upgrade were strong economic growth and improved monetary policy credibility. It specifically downplayed the impact of the US tariffs, maintaining that this would be manageable due to the limited reliance on trade and the dominance of domestic demand in the economy.

Similarly, the Asian Development Bank has recently maintained the growth projection for FY 2026 at 6.5 per cent, while revising the forecast downward for FY 2027 to 6.5 per cent from 6.7 per cent earlier. While noting that tariffs may weigh on growth, it has argued that the overall impact on GDP will be contained due to several factors. These include India’s relatively lower exposure to the US market, increased exports to alternative markets, sustained strength in services exports, and an increase in domestic demand. 

Shift In Exports 

It is also illuminating to have a look at the composition of India’s exports in recent years. These are now dominated by petroleum products along with gems and jewellery, pharmaceuticals, and electronics goods, especially smartphones. Defence exports have also shot up in recent years to reach Rs. 23622 crore in FY25, as compared to only Rs. 686 crore in FY14. Nearly all areas are likely to find alternative outlets in case the American market becomes restricted.

Petroleum products, in any case, are being sold largely to Europe, Singapore, and the UAE. Sanctions may have been imposed on one refinery, but shipments are reportedly already resuming after a brief lull.

Gems and jewellery manufacturers are already looking at other markets, especially in West Asia, while electronic goods, including smartphones, continue to be insulated from tariffs. The pharma sector is still waiting for clarity on the new round of tariff announcements, while there are no indications of defence exports being impacted as yet.

A holistic examination of the trade sector, therefore, clearly shows that the impact of the US protectionist policies is likely to be limited in the medium term. There will be a short-term impact in selected sectors, like fisheries, but others, like furniture products, are set to benefit from the latest tariffs. The overall impact on growth, however, is not likely to be as significant as earlier anticipated, in light of the domestic orientation of the Indian economy.