50% U.S. Tariff on India, What Will Modi Do?

U.S. President Donald Trump has imposed a 50% tariff on Indian goods exported to the United States. The tariff, announced earlier, came into effect on Wednesday (August 27).

This has made the implementation of the “Make in India” initiative significantly more difficult, according to a BBC report.

In response to Trump’s tariff, Indian Prime Minister Narendra Modi urged his countrymen to increase domestic production and consumption.

The BBC report notes that earlier this month, Modi had reassured citizens that major tax relief for ordinary people and small businesses was on the way.

On Independence Day, wearing a bright saffron turban while addressing a public rally at the Red Fort in Delhi, Modi called for self-reliance (Atmanirbhar Bharat). He encouraged shopkeepers and business owners to put up signs saying “Swadeshi” or “Made in India” in front of their stores.

At the time, Modi said, “We must become self-reliant—not out of despair, but out of pride. Around the world, economic protectionism is rising. We cannot afford to cry over it; we must rise on our own strength.”

He has since repeated this message in at least two more rallies.

Impact of U.S. Tariffs
Analysts believe Modi’s call was a direct response to Trump’s 50% tariff, which came into effect on August 27. India’s export-driven sectors—such as textiles, diamonds, and shrimp—are expected to suffer significantly.

Modi’s message was clear: “Produce in India, spend in India.”

But the challenge remains that “Make in India” has struggled. Despite subsidies and incentives, manufacturing’s share of India’s GDP remains stuck at 15%.

Focus on Tax Reforms
Now Modi is focusing on tax system reforms. After announcing $12 billion in income tax cuts in the budget, he has shifted his attention to indirect taxes—specifically, simplifying and reducing the Goods and Services Tax (GST).

The GST was introduced eight years ago to simplify India’s complex tax structure. But multiple layers and exemptions have made it complicated. Modi has now promised a two-tier simplified GST system.

U.S.-based brokerage Jefferies said that combined with income tax cuts, these reforms could inject $20 billion into the consumer sector.

Boosting Consumer Spending
Nearly 60% of India’s economy depends on consumer spending. While demand in rural areas has held up due to good harvests, urban demand has weakened because of layoffs and falling wages. Tax cuts could help revive spending.

According to Morgan Stanley, the reforms will boost GDP, reduce inflation, and serve as an important stimulus amid global trade uncertainty. Sectors like motorcycles, small cars, clothing, and cement—which see increased demand during Diwali—are expected to benefit most.

Although revenue losses are a concern, they are expected to be offset by higher tax collections and greater dividend transfers from the Reserve Bank of India. Swiss investment bank UBS predicts that GST cuts will have a greater direct impact on consumers than earlier corporate tax or income tax relief measures.

These steps could also encourage India’s central bank to cut interest rates again, boosting credit flow. Meanwhile, pay raises for half a million government employees, due to take effect next year, will further accelerate growth.

Market and Global Reaction
The stock market has already responded positively. Despite global trade turmoil, S&P Global upgraded India’s credit rating for the first time in 18 years, which will lower government borrowing costs and attract more foreign investment.

However, despite reforms, India’s growth rate has slowed well below the 8% levels of recent years. Trade relations with the U.S. remain tense—especially over India’s purchase of Russian energy. Scheduled trade talks have also been canceled.

Experts warn that a 50% tariff is effectively equivalent to a trade embargo between two of the world’s largest and fastest-growing economies—something that would have been unimaginable only a few months ago.