India, Punished by Trump Tariffs, Responds in Way You Wouldn’t Expect

U.S. President Donald Trump’s war on trade has found a new hot frontline in the form of India. Where does this sudden attack on a former ally lead, for companies and investors?

The world’s fourth-largest economy, fresh from eclipsing Japan in size, is hit with 50% import duties into the United States as of Wednesday. That’s a rate that businesses and analysts say effectively cuts off trade. It also leaves India looking at the same punitive rate as Brazil, the highest worldwide.

“The United States is India’s largest export destination, accounting for 30% to 40% of exports in some of India’s key industries,” note Nomura’s Asia economics team of Sonal Varma and Aurodeep Nandi. “So a steep 50% tariff would be akin to a trade embargo, particularly hitting smaller firms in sectors with lower value-add and thinner margins.”

It also takes Indian tariff rates above the 30% currently effective for China. That dents India’s ambitions to be the primary “China + 1” destination for multinationals looking to expand outside China. The efforts have been yielding results with the likes of Apple AAPL, which had been planning to make the bulk of its iPhones for sale in the United States at its Indian operations, including contract manufacturers such as Foxconn HNHPF (TW:2317).

Indian Stocks Head South

The tariff imposition has sent Indian shares south, as you might expect. The Nifty 50, tracking 50 large-cap stocks on the National Stock Exchange, is down 2.3% in the last week, leaving the index only just above par for the year. The Sensex, a Dow-like instrument tracking 30 large caps on the Bombay Stock Exchange, is also down to the tune of 2.3% in the last week.

The spillover hits the likes of Foxconn, down 1.0% Thursday in Taiwan trade, to match the overall 1.2% drop in Taiwan stocks. Chipmaking heavyweight TSMC TSM (TW:2330) fell 2.5% after Nvidia NVDA released record earnings that nevertheless prompted a mixed response.

What you might not expect is the surprisingly hostile response from the Indian government and the Indian populace, the world’s largest. They’re defiant.

Indian Prime Minister Narendra Modi is urging citizens to heed the call of the “Make in India” campaign. “All of us should follow the mantra of buying only ‘made in India’ goods,” Modi said on Tuesday, encouraging shopkeepers to put up signs promoting locally made wares. “Pressure on us may increase, but we will bear it.”

The pressure may actually give Modi, a staunch nationalist, added impetus. Launched in 2014, the same year Modi took power, the “Make in India” program has so far failed in its three main targets: to boost manufacturing by 12-14% per year, to create 100 million manufacturing jobs; and to ramp manufacturing up to 25% of India’s economic output.

The tariffs may also push India, a key democratic ally in Asia, closer to China and Russia, regional rivals that India has traditionally looked to keep at arm’s length. Chinese President Xi Jinping sniffs opportunity, reaching out behind the scenes, and Modi will make his first visit to China in over seven years for the Shanghai Cooperation Organization summit in Tianjin from August 31 to September 1.

Will Tariffs Remain?

It is uncertain where things head from here, since Trump is making up the justification for tariffs as he goes along. The India tariffs, for instance, were laid out in an August 6 executive order purportedly addressing the threat to the United States from Russia. India’s purchases of oil “directly or indirectly” from Russia merit an extra 25% tariff, effective August 27, atop the initial 25% set out at the end of July as Trump raised U.S. import taxes on most trading partners.

As I noted in a column on Indian stocks at the start of this month, India began purchasing Russian oil at a price cap, as part of a U.S. plan to “box in Russia” and prevent a price surge in oil prices. That much is explained here by then-U.S. ambassador to India, Eric Garcetti.

Now the U.S.-directed plan is a problem. A big problem, according to Trump, who says Indian oil purchases have produced a U.S. “national emergency,” wording he must use to circumvent these tariffs requiring congressional approval. The United States apparently faces plenty of national emergencies — Trump has used 10 emergency declarations to justify hundreds of presidential actions, the latest being the sudden focus on crime in Washington, D.C.

Except these aren’t national emergencies, are they? They’re attempts to shake down foreign governments for concessions on trade. And these foreign trading partners aren’t “ripping off” the United States by engaging in trade, either. Companies and consumers alike benefit from a mutual exchange of trade. The full effects of the disruption aren’t yet manifest, I feel, but may impact Q4 earnings.

Key Industries Exempt

Around 60% of U.S. imports from India are now subject to the 50% import tax. That makes for an effective tariff rate of 33.6%.

Sectors such as garment manufacturing, jewelery and seafood will be hardest hit. Select sectors such as pharmaceuticals, electronics, drug ingredients and, perversely, refined fuels are exempt, essentially because the United States needs them. So lower-margin businesses will suffer but those in higher-end manufacturing escape.

Nomura expects the baseline 25% tariff to remain in place for the 2026 fiscal year. But it expects the 25% penalty to be removed after November, once Trump feels he has made his point, and if both sides are ready to compromise.

The disruption prompts the Japanese bank to lower its growth forecast for India from 6.2% to 6.0%, still the fastest in the world among major nations. It’s well ahead of the 2.8% forecast for global growth, and even the elevated 3.9% output bounce expected in emerging markets.

Inflation, Normally Too High, Now Too Low?

One bonus outcome from the tariffs is that inflation has come under control. Often a problem in India, the consumer price index has sunk to a paltry 1.55% as of July, down from a whopping 6.2% last August. It is expected to hover around a manageable 2.7% in the next fiscal year.

If anything, the risk is toward disinflation, Nomura notes. “We see downside risks,” their India economics team state, thanks to weaker demand and sales-tax changes inside India. But it is unlikely that would tip into outright deflation.

Forecast earnings per share growth in India, expected to come in at 12.5% for the 2025 fiscal year and 16.2% for the 2026 year, are very high. Only South Korean earnings outpace that. And South Korean stocks have been the stars among Asian indexes this year, with the Kospi up 33.2% year to date.

Yet Indian equities are being held back. The Nifty 50 is only just notching a gain for the year, up a paltry 3.2% in 2025, with the Sensex similarly up just 2.0%.

The tariffs and low inflation set the stage for two likely interest-rate cuts this year from the central Reserve Bank of India. It became the first major central bank to cut rates in January this year, and has trimmed the base rate from 6.5% heading into 2025 to 5.5% now. They may fall to 5.0% by year-end.

That should set the stage for some catchup by Indian equities next year. I admitted in February that I was too early to call an entry point into Indian equities. But with rates set to fall, Indian stocks should rally in 2026, particularly if the tariffs are removed in Q4 as Nomura expects.

At the time of publication, McMillan had no positions in any securities mentioned.