The tariff assault launched on the world by the US President has caught every country by surprise, and it appears that global trade flows will be disrupted for some time. With the US being the largest consuming country in the world, the President probably assumed he could dictate terms to other countries and have his way—either to boost the American economy, score political points, or both. However, he has clearly failed to understand that such a tariff assault is a double-edged weapon. It remains to be seen who will have the last laugh.
One of the major aims of the US President in launching this tariff assault is to curb imports and boost domestic production, thereby strengthening the country’s economy. However, the move should have been preceded by a significant build-up of manufacturing capacity in the US at globally competitive costs, in order to reduce imports. While the President speaks of building domestic manufacturing capacity, he has in fact put the cart before the horse by imposing high tariffs before such capacity has been established.
With high per capita income and a culture of high consumption, Americans are unlikely to reduce their demand for imports. The outcome is that imports may not fall, but US consumers will end up paying more for imported goods. This will add to inflationary pressures and raise the cost of living. Reports suggest that even within days of the tariff announcement, inflation rates in the US were already rising and commodity prices were showing an upward trend. Despite higher costs, US consumers will continue to purchase imported goods to maintain their lifestyle.
Capacity expansion in the US can only occur if investors are convinced of their ability to produce a wide range of goods at globally competitive costs. It is highly doubtful whether many consumer and commodity products, which are currently imported on a large scale from countries such as China, India, and Vietnam, can be produced in the US at comparable prices. For both producers and consumers, this is essentially a make-or-buy decision, and for producers the choice will be based purely on economic returns.
There has been considerable concern in India about the highest tariffs imposed by the US President on Indian goods, though the Modi government has reacted with remarkable calm and without any knee-jerk response. No doubt, this tariff burden will affect India for some time, as 17% of Indian exports currently go to the US. At the same time, it is noteworthy that pharmaceutical exports from India have been exempted, since Indian pharma companies supply around 40% of the generic drug requirements of the US. Clearly, the calm reaction of the Modi government reflects its confidence that this challenge can be converted into an opportunity, viewing the emerging scenario as a blessing in disguise.
There is now a realisation across investors, industries, and consumers in India that the country should not expose itself to a situation such as the one created by the US tariff assault, or by similar measures from any other country. In future, strategies must be developed and implemented to prepare for such eventualities.
The ground reality is that India today faces the difficult situation of high import dependence. The current level of reliance on imports for key industrial inputs is unacceptably high, making the country highly vulnerable to international supply and price pressures. As consumption of various products continues to rise due to steady economic growth and greater purchasing power, this has only deepened dependence on imports of vital industrial inputs and consumer products. The issue is not about building a domestic market base, which will expand naturally with economic growth, but rather India’s inability to increase domestic production in line with demand.
In pharmaceuticals, for example, most requirements for Active Pharmaceutical Ingredients (APIs)—the key inputs for generic drugs—are met through imports, particularly from China. While India is a major producer of generic medicines, the industry’s base is weak due to inadequate domestic production of APIs. If China were to restrict API exports, Indian pharma units could be nearly paralysed, leading to a severe crisis.
In the case of electric vehicles, now being strongly promoted, the essential lithium-ion battery cells are not produced in India. While some capacity is being built, the country does not yet produce several of the chemicals and materials required. EV manufacturers have already been hit by shortages of rare earth elements and magnets, which are crucial for EV motors. On 4 April 2025, China imposed restrictions on the export of several rare earth elements and magnets. Beyond EVs, these materials are also extensively used in defence, energy, and automotive sectors in India.
The semiconductor industry is also being developed, but one of its key inputs, high-purity chemicals, is not produced in India. Similarly, several inputs for the solar industry are lacking. India also imports large quantities of speciality fertilisers for high-value crops such as fruits and vegetables, particularly from China.
In chemicals, India is almost entirely dependent on imports of bulk products such as methanol (over 3 million tonnes per annum), PVC (over 3 million tonnes), styrene (over 1 million tonnes), citric acid (over 100,000 tonnes), and polycarbonate resin (over 200,000 tonnes). The list of such heavily imported chemicals is uncomfortably long. To put it simply, any curtailment of imports of key industrial inputs would seriously damage Indian production and adversely affect economic growth.
Export dependence, by contrast, is not inherently problematic. In fact, setting targets for exports is essential, since export trade supports economic growth. However, sustained export growth can only come from strengthening domestic capacity, which would also reduce import dependence. Moreover, higher export targets should be matched by stronger domestic consumption, which can act as a “shock absorber” if exports are hit by tariff assaults from other countries. India is facing exactly such a situation now, suffering from excessive export dependence in the wake of the US tariffs.
Research and development (R&D) and innovation are the cornerstones of sustained national growth, both to curb imports and to boost exports. Unfortunately, India’s domestic capacity building has long been held back by weaknesses in indigenous technology. Too often, technology has had to be purchased from abroad at exorbitant costs. Even for products already manufactured in India, companies repeatedly turn to foreign technology when expanding or setting up new facilities. In some cases, overseas technology is not even available, as countries are unwilling to share the latest advances.
The crux of the issue, therefore, is the challenge of strengthening domestic R&D capabilities. The responsibility lies with Indian technologists, who must significantly build up the country’s technology base. There is no reason to lack confidence: India has repeatedly demonstrated its ability to achieve breakthroughs, as seen in space technology, nuclear energy, and the rapid development of medicines during the Covid crisis.
The government has done its part by announcing incentives, increasing funding, and introducing schemes such as Production Linked Incentives (PLI) to boost research and capacity building. Initiatives in areas such as green hydrogen and renewable energy are commendable, but the government can only do so much. The real shortfall lies with public and private industries, which invest far too little in R&D. Many firms spend only a minimal share of their profits on research, focusing instead on quality control rather than developing new technologies. Too often, companies prefer to buy technology from abroad rather than investing in domestic innovation.
The network of CSIR laboratories is meant to promote research, but the question remains whether their achievements justify the government’s investment. Many CSIR labs have partly shifted into academic roles, producing graduates and postgraduates instead of prioritising research. This dilutes their focus. It is encouraging that the Agriculture Minister has directed the Indian Agricultural Research Institute (ICAR) to discontinue undergraduate courses, ensuring that research remains the priority. This model should be extended to CSIR labs across the country.
India has also established many new Indian Institutes of Technology (IITs), while the older ones in Chennai, Mumbai, Delhi, Kharagpur, and Kanpur have built strong reputations. These five IITs in particular should now focus entirely on research and development rather than producing graduate engineers. With hundreds of engineering colleges already operating across the country, the IITs should concentrate on innovation and advanced research instead of routine teaching.
