Opinion: Reducing India’s Exposure to U.S. Tariff Risks

Context

• • The U.S. Senate has passed the Lindsey O. Graham Sanctioning Russia and Iran Act, 2026, which seeks to increase economic pressure on countries purchasing Russian energy. The legislation would allow the U.S. President to impose tariffs of up to 100% on goods from major importers of Russian oil/gas, potentially including India. However, the Bill is not yet law; it still requires consideration by the U.S. House of Representatives. Therefore, the tariff threat should be viewed as a potential risk and negotiating instrument, not an immediate 100% tariff.

Why is India vulnerable?

• • India has substantially increased its dependence on Russian crude oil since the Russia-Ukraine war.
  • Before the war, Russian crude accounted for only around 2% of India’s crude imports; it subsequently became a major source because of discounted Russian oil.
  • The strategic rationale was strong:
    • Lower crude prices → reduced import costs.
    • Diversification away from traditional Middle Eastern suppliers.
    • Greater energy-security options during global uncertainty.
  • But this has created a new vulnerability: energy diversification from one perspective has produced geopolitical concentration risk from another.
  • Russia accounted for around 30% of India’s crude imports in FY2026, according to recent estimates.

The fundamental dilemma

Cheap Russian oil → energy security + lower costs

but

Heavy Russian dependence → exposure to U.S. sanctions/tariffs

Thus, India has to balance energy security, strategic autonomy and export competitiveness.

Why are U.S. tariffs particularly important?

• • The U.S. is one of India’s most important export markets.
  • High tariffs can make Indian products less competitive against exporters from countries facing lower duties.
  • The impact would be particularly serious for labour-intensive sectors such as:
    • Textiles and apparel
    • Leather and footwear
    • Gems and jewellery
    • Engineering goods
    • Auto components
    • Marine products
  • These sectors are important because they generate substantial employment, particularly for MSMEs.

The U.S. has already used trade policy as a geopolitical instrument. In July 2026, it imposed an additional 10% Section 301 duty on imports from India linked to its forced-labour investigation, although several important products remain outside its scope.

Important Insight: Export Diversification

The editorial uses GTAP-based trade simulations to compare two scenarios:

Scenario 1 — Heavy U.S. sanctions

• • 110% U.S. tariff on India.
  • India’s welfare falls by nearly $47 billion.
  • Aggregate exports decline by 5.1%.
  • Imports decline by 5.2%.
  • Domestic demand and sectoral output contract.

Scenario 2 — Same tariff shock + export diversification

Using a full India-EU FTA as a proxy for diversification:

• • Welfare improves by about $26.3 billion.
  • Aggregate exports increase by 3.1%.
  • Imports rise by 2.6%.
  • GDP, domestic demand and sectoral output recover.

Analytical significance: The model suggests that the answer to tariff vulnerability is not necessarily abandoning Russian oil immediately, but reducing dependence on any single export destination.

Why the EU becomes strategically important

• • The India-EU FTA can provide access to a huge high-income market.
  • It can enable India to redirect part of its exports if access to the U.S. becomes more expensive.
  • The broader India-U.S. relationship also shows why India needs multiple economic partnerships: India and the U.S. had announced an interim trade framework in February 2026, including an 18% reciprocal U.S. tariff rate on specified Indian originating goods and further negotiations on a broader bilateral trade agreement.

But diversification is not automatic

Signing FTAs does not automatically create exports.

Indian firms still need to overcome:

• • Non-tariff barriers
  • Quality and certification requirements
  • High logistics costs
  • Limited economies of scale
  • Weak global-brand penetration
  • Low technological intensity in several manufacturing sectors

Therefore:

Market access + domestic competitiveness = sustainable export diversification.

Diversification must be both geographical and product-based

India should not merely replace dependence on the U.S. with dependence on the EU.

Geographical diversification

India should expand exports to:

• • EU
  • UK
  • ASEAN
  • Gulf countries
  • Africa
  • Latin America
  • Australia and other Indo-Pacific economies

Product diversification

India must move beyond traditional labour-intensive exports towards:

• • Electronics
  • Semiconductors and components
  • Machinery
  • Pharmaceuticals
  • Chemicals
  • Defence equipment
  • Green technologies
  • Engineering and R&D services

Example: India’s rapidly growing electronics exports demonstrate how moving into higher-value manufacturing can strengthen export resilience.

Domestic reforms are the real long-term solution

Export diversification cannot compensate for weak competitiveness indefinitely.

India should focus on:

• • Lower logistics and transaction costs
  • Faster customs clearance
  • Stable and predictable trade policies
  • Removal of inverted-duty structures
  • Better product standards and certification
  • Integration of MSMEs into global value chains
  • Greater R&D and technological capability
  • Skilled workforce
  • Stronger port and multimodal infrastructure

The objective should be to make Indian products competitive even without preferential tariffs.

Way Forward

• • Diversify crude sources to avoid excessive dependence on Russia.
  • Diversify export destinations beyond the U.S.
  • Conclude and effectively implement major FTAs, especially with the EU.
  • Move from low-value assembly to high-value manufacturing.
  • Strengthen MSME export capabilities.
  • Improve logistics, standards and trade facilitation.
  • Continue diplomatic engagement with Washington to prevent excessive tariff escalation.
  • Maintain strategic autonomy rather than allowing either energy dependence or export dependence to become a geopolitical vulnerability.

Conclusion

The issue reflects a larger transformation in the global economy: trade, tariffs and supply chains are increasingly being used as instruments of geopolitical power. India’s response should therefore not be limited to negotiating lower tariffs. It requires building an economy capable of diversifying markets, products and energy sources while remaining globally competitive. India’s best defence against U.S. tariff coercion is not protectionism, but diversified trade + competitive manufacturing + strategic autonomy.

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