While India recalibrates its export strategy and trade partnerships, structural domestic industrial reforms also need addressing.
Amid the ongoing trade restructuring sparked by U.S. President Donald Trump’s tariffs, India remains the hardest hit among all Asian economies with a staggering 50 percent tariff. With the United States serving as the biggest buyer of India’s labor-intensive exports – from textiles and leather to footwear and toys – the tariff hike lands a sharp blow to New Delhi’s trade prospects in these industries.
The high demand elasticity and low margins of these products add to the woes, as buyers will quickly shift to cheaper alternatives from other markets such as Vietnam, Bangladesh, and Sri Lanka. This will not only dampen India’s export competitiveness but pose a serious setback for livelihoods, affecting millions of low-skilled and semi-skilled workers employed in the MSME (micro, small and medium enterprises) and organized sectors. The textile industry alone accounts for nearly $654 million worth of exports from India to the U.S. and provides jobs for about 45 million people. Now India is facing a significant loss in these industries even as its attempts to build up indigenous manufacturing capabilities.
India can leverage its recently signed free trade agreements with Australia, the UAE, Mauritius, the U.K., and the European Free Trade Association, specifically to negotiate favorable sector-specific benefits.
The steep U.S. tariff hikes have delivered a jolt, further underlining the vulnerabilities in India’s conventional trade strategy. In response, India must urgently rethink and diversify its strategic trade partnerships.
New Delhi is already trying to cushion the blow of tariffs by stepping up diplomatic outreach to secure trade pacts and diversify export markets for Indian goods. India can leverage its recently signed free trade agreements with Australia, the UAE, Mauritius, the U.K., and the European Free Trade Association, specifically to negotiate favorable sector-specific benefits. For instance, the recent India-U.K. Comprehensive and Economic Trade Agreement (CETA) gives a boost especially to labor-intensive and traditional products from India.
While India recalibrates its export strategy and trade partnerships, there are other structural domestic industrial reforms that need addressing, now more than ever. A large part of India’s labor-intensive industry remains unorganized, which makes it difficult for the sector to benefit from domestic incentive schemes. Access to financial credit, high production costs, disintegrated value chains, inadequate infrastructure, and lack of skilled workers are other challenges that slow down the industries’ potential scope.
Further, India remains at a disadvantage when it comes to complying with global quality and sustainability standards. For instance, the EU already has 16 pieces of legislation in place that require manufacturers in the fashion value chain to meet ESG benchmarks. Indian companies still struggle to match these norms, and it becomes increasingly difficult for MSMEs to compete and apply economies of scale due to rising costs associated with certifications, testing, and designing.
To further protect India’s industries and diversify supply chains, the focus should be centered around scaling domestic consumption, improving brand exposure, and reducing operational costs. Strategic policy can provide the labor-intensive industries a further push in global competitiveness. As it stands, India’s manufacturing-centric schemes are mostly concentrated toward capital-intensive industries; an extension of the Production Linked Incentive (PLI) scheme and the Design Linked Incentive (DLI) scheme should be in effect for all the labor-intensive industries with lower eligibility thresholds to leverage India’s enhanced indigenous design capabilities. These schemes can encourage skilling, technology adoption, and innovation while also increasing global competitiveness. Special attention can be given to MSMEs, which are the backbone of these industries but often lack access to finance and modern infrastructure.
Intellectual property rights and geographical indications can help protect and promote traditional knowledge, designs, and innovations and give India’s traditional goods a unique identity in global markets.
Special attention can be given to MSMEs, which are the backbone of these industries but often lack access to finance and modern infrastructure.
India can also benefit through technology transfers and joint ventures with global manufacturers that provide indigenous industries access to advanced production techniques, quality control, and safety compliance, bringing in harmonization of standards for MSMEs. To facilitate this, the government could attract FDI and encourage co-investment with Indian partners in R&D and manufacturing. They can achieve this by encouraging assembly, testing, manufacturing, and packaging in key clusters.
Currently labor-intensive manufacturing is dispersed across India. The complexity of the supply chain and lack of localization can increase costs of production. The focus can be redirected towards building a resilient supply chain to allow smoother raw material sourcing, strengthen supplier networks, and improve logistics and warehousing. Cluster-based models for shared resources and localization can create a strong value chain and help India move up the chain by providing end-to-end solutions.
Vietnam, for example, built dedicated footwear industrial parks with in-house custom clearances and container terminals, which helps these companies reduce costs as well as shipping time. However, this level of restructuring would require serious policy symmetry and alignment at the center and state level.
For India, the tariffs are not a mere numbers game but a factor that critically impacts its social stability. The sudden punitive action has in fact revealed India’s economic fault lines, including the overreliance on one export market and the lack of policy cushioning. By aligning newer trade pacts with its domestic industrial reforms, India’s labor-intensive sectors could find fresh footholds in emerging growth markets across Asia, Africa, and Latin America. But India needs to move fast to prevent ceding ground to more nimble Asian economies.
This commentary originally appeared in The Diplomat.
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