Why India’s Growth Has Held Firm Despite Trump’s Tariff Shock

When US President Donald Trump announced sweeping tariff hikes on imports from even close partners during his so-called “Liberation Day” in April, the global consensus was grim. Retaliation was expected, markets tumbled, and economists warned of a synchronised slowdown marked by inflation in the US and collapsing trade elsewhere. Nine months later, the outcomes look far more complex. The US posted headline growth of 4.3%, and India clocked a robust 8.2% growth in the second quarter of the current financial year. The resilience of India’s economy, in particular, offers lessons on how large, diversified economies absorb global trade shocks.

The tariff shock and the rare-earth turning point

The initial escalation was dramatic. Washington imposed tariffs of up to 150% on Chinese imports. Beijing responded in kind and went further by banning exports of several medium and heavy rare-earth elements — including dysprosium, neodymium and terbium — critical for high-temperature magnets used in drones, electric vehicles, missiles and advanced manufacturing.

Although countries such as China, Vietnam, Brazil, Russia and India hold large rare-earth reserves, China controls nearly 90% of global refining capacity. These elements are typically mined elsewhere but shipped to China for separation and processing, giving Beijing disproportionate leverage. The restriction quickly exposed vulnerabilities in advanced manufacturing supply chains across the US and its allies.

This leverage forced a rethink. On the sidelines of the APEC summit in Gyeongju, South Korea, Trump reached a compromise with Xi Jinping. The rare-earth ban was lifted for a year, the US allowed exports of advanced H200-series chips from Nvidia to China, and tariffs on Chinese goods were eventually lowered to about 47%. The episode underlined how deeply interdependent the two economies remain, despite strategic rivalry.

China adapts, trade reroutes

China’s export story after the tariffs defied expectations. While shipments to the US plunged sharply in late 2025, exports to the EU rose and sales to Africa, Southeast Asia and Latin America expanded strongly. Overall exports still grew, driven partly by trans-shipment — rerouting goods through third countries to blunt the impact of US duties.

This pattern matters for India. Early estimates suggested Trump’s tariffs could hit nearly a quarter of India’s exports to the US. In reality, the impact was closer to 10%. Like China, Indian exporters adapted by redirecting shipments, diversifying markets and absorbing part of the tariff burden.

Why US inflation stayed lower than feared

One reason the tariff shock did not immediately translate into runaway US inflation was stockpiling. Anticipating reciprocal tariffs, US importers built up inventories, cushioning prices for several months. Roughly a third of the additional tariff burden was absorbed by US importers, another third by exporters (including Indian firms), and only the remaining portion passed on to consumers. Inflation, which stood at 3% in October, eased to around 2.7% in November.

US growth in 2025 also reflected the artificial intelligence investment boom. Massive capital expenditure on data centres boosted GDP numbers, though with limited job creation. Unemployment rose from about 4% to 4.6% during Trump’s second term, highlighting the uneven nature of this growth. As inventories normalise and AI investment matures, the US faces the risk that tariffs will begin to feed more directly into prices and slow growth.

India’s resilience: domestic demand and diversification

India’s growth story has rested on different foundations. A large domestic market, resilient services exports and counter-cyclical policy support helped cushion external shocks. Interest rate cuts totalling about 125 basis points revived credit demand, while tax relief for the middle class, GST rationalisation and the rollout of long-pending labour codes improved sentiment.

Public investment remained strong, with more than half of the year’s capital expenditure deployed in the first half of the fiscal. A favourable monsoon supported agriculture, while manufacturing and services — now contributing nearly 60% of gross value added — grew around 9%, sustaining overall momentum.

Strategic trade and supply-chain shifts

India has also responded strategically to the new trade environment. Supply chains for critical inputs such as rare-earth magnets and key minerals are being diversified. Free trade agreements with partners including the UK, UAE, Singapore, Malaysia and New Zealand have reduced tariff barriers and expanded market access. These deals matter less for headline numbers and more for reducing vulnerability to unilateral trade actions.

Despite pressures from foreign portfolio outflows and a weaker rupee, India’s export base has broadened. Services exports, in particular, continue to act as a stabiliser when goods trade faces turbulence.

Risks that still need managing

Resilience does not imply immunity. Credit transmission remains uneven, especially for MSMEs and households. Slower tax revenue growth following recent reforms could constrain fiscal space, while a consumption-led upswing carries inflation risks. Sectors most exposed to tariffs — textiles, gems and jewellery, automobiles and seafood — will need targeted support through credit guarantees and tax relief.

At the same time, new growth engines are emerging. Health tourism, already a $40-billion industry, could touch $100 billion by 2030 as India’s capabilities in cardiac care, oncology, transplants and robotic surgery gain global trust. Alongside China, India is also one of the few countries supplying large numbers of STEM graduates to the global economy, reinforcing its role in AI, digital infrastructure and high-tech manufacturing.

Why the growth story still holds

The global tariff shock of 2025–26 has not rewritten the fundamentals. The US may yet feel the delayed costs of protectionism as inventories thin and price pressures rise. India, by contrast, has demonstrated that scale, diversification and domestic demand provide insulation in an uncertain world.

Already the world’s fourth-largest economy, India is on track to move higher in the global rankings. Trade wars and volatile capital flows will continue to test policymakers, but the evidence so far suggests that India’s growth trajectory in 2026 and beyond remains intact — not because shocks were avoided, but because the economy proved capable of absorbing them.