India, explained.
An assembly line at a VinFast Auto Ltd factory in Thoothukudi, Tamil Nadu, India (Dhiraj Singh/Bloomberg via Getty Images)
Deeper structural problems at home pose bigger challenges than the trade dispute with Washington.
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Trump’s tariffs are only part of the problem for Indian manufacturingTrump’s tariffs are only part of the problem for Indian manufacturing
It wasn’t meant to be this way. That India is alone among key US partners in facing tariffs of up to 50% after decades of cultivating ties has shocked close observers of the bilateral relationship.
US businesses are not alone in facing legitimate grievances doing business with India. New Delhi has left itself exposed – even if there is more than a whiff of short memories and selective outrage – by continuing to ship huge volumes of Russian oil.
For as long as these tariffs endure, India’s access to its most important market will be materially circumscribed.
Despite narratives about the inexorable Sinification of the global economy, US imports of manufactured goods have outpaced China’s by a factor of four to one over much of the last decade. Unless you’re one of the narrowing list of companies making something that China can’t, the US will be your most important export market.
India is no exception. Pharmaceuticals (exempt from tariffs for now), electronics, machinery, textiles, apparel and steel were among the major categories of Indian goods to the United States in 2024.
Apple is the most prominent example of India becoming a critical pillar of US corporate “China plus one” strategies. Apple has been pushing its suppliers to set up shop in India for more than a decade. Indian factories now assemble most of US-bound iPhones. Apple’s deft lobbying means that iPhones will be exempt from tariffs.
Apple CEO Tim Cook at the White House on 6 August 2025 after presenting Donald Trump a gift and pledging further investments in the United States (Daniel Torok/Official White House Photo)
A common factor in these sectors is that they are all relatively labour-intensive. These are exactly the sort of sectors that Indian economists want New Delhi to foster – even if the government has a propensity to prioritise sectors du jour, such as semiconductors.
Robust GDP growth figures belie India’s broader structural problems, namely the entrenched problem of jobless growth.
The Modi Government’s objective to grow manufacturing to 25% of GDP – set way back in 2014 – was aimed at creating jobs for India’s un- or under-employed masses. Yet, manufacturing has languished around 17% of GDP, unchanged over the last decade.
The loss of unfettered access to the US market won’t help India’s case. Competitors including Vietnam, Thailand and Bangladesh face significantly lower tariffs. India’s average tariff differential with China of around -7% is cold comfort given China’s advantages in scale and productivity.
Equally, it’s possible to focus too much on market access.
There remain far more fundamental constraints inhibiting Indian manufacturing.
Openness to reform has generally failed to percolate beyond India’s south, where foreign investment and manufacturing are disproportionately located.
On the input side, acquiring land can be a tortuous process. Despite a rapid infrastructure build-out, logistics and access to reliable utilities remain challenging. The cost of capital is a further hindrance.
Some level of protection is needed if Indian companies are to compete on their home turf in the age of gargantuan Chinese overcapacity. But a surfeit of protectionism in industries such as steel and textile raw materials – invariably influenced by cronyism – risks destroying more jobs than it protects.
Scale should be the friend of Indian manufacturers. Unfortunately, major features of India’s regulatory architecture conspire to make scale unattainable or even undesirable. The average labour-intensive Indian company employs just 21 workers.
As soon as businesses employ more than 100 workers, India’s notoriously (although slightly less so these days) sclerotic bureaucracy is granted considerable powers over the ability of business to fire workers and expand. The sheer complexity of labour laws is a major challenge.
To its credit, the Modi government sought to streamline the process of land acquisition and liberalise agriculture – partially with the view to encouraging surplus labour to follow the well-worn path to industrialisation by taking up factory jobs in cities. Vociferous opposition from sectional interests forced these reforms to be shelved. The Modi government did successfully consolidate India’s labour laws into four discrete codes, although implementation has stalled.
Individual southern states – Tamil Nadu, Karnataka and Maharashtra – which have traditionally been much more business friendly have undertaken reforms to attract major investments, including from Apple suppliers. Yet this openness to reform has generally failed to percolate beyond India’s south, where foreign investment and manufacturing are disproportionately located.
So far, there are only limited signs that the Modi government is contemplating any big-bang reform package as a counterweight to US tariffs. Modi may be chastened by last year’s surprise election results.
One interesting dynamic with an economic silver lining is the move towards a rapprochement with China. Though India had been gradually moving in this direction, US tariffs have provided an added impetus.
Since border clashes in 2020, India has made it much harder for Chinese companies to invest. India is right to be wary of certain Chinese investments and overreliance on Chinese tech. However, carefully negotiated partnerships for technology transfer are rumoured, such as the agreement for access to lithium ion batteries that Adani is reportedly negotiating with CATL. Such partnerships could be a pragmatic way to develop manufacturing nous.
Still, little that India can do on the diplomatic front – whether with Washington or Beijing – will substitute for reforms that start at home.
About the author
Henry Storey
Henry Storey is Manager - Projects, Research and Analysis at Dragoman with a focus primarily on Asia and the South Pacific.
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