Mumbai: A palpable anxiety is rippling through India’s economic ecosystem. In the boardrooms of Mumbai’s financial district and on the factory floors of Gujarat’s industrial corridors, conversations are dominated by a single topic: tariffs. The recent imposition of steep US levies has sent shockwaves across an economy for which the United States is its indispensable and largest trading partner. With bilateral trade in goods and services crossing $220 billion in the 2024-2025 fiscal year, the US is not just a market; it is a critical source of foreign direct investment, a partner in technological innovation, and the primary client for India’s formidable IT services sector. A trade dispute of this magnitude is a serious challenge, threatening the immediate future of many businesses. Yet, this moment is not without precedent. India has a history of turning moments of acute crisis into catalysts for profound transformation. Adversity, it seems, has repeatedly served as the flint that sparks India’s greatest leaps forward, forcing a nation often content with incremental change to take decisive, structural leaps.
This pattern is well-established. In 1991, India stood at the edge of an economic abyss. On the verge of a sovereign default, its foreign reserves dwindled to just over $1 billion—enough to cover a mere three weeks of essential imports. The government was forced to physically pledge its gold reserves to secure emergency loans. This humiliating crisis, however, became the impetus to dismantle the suffocating “Licence Raj,” a labyrinthine bureaucracy that required government permission for nearly every aspect of business, from increasing production capacity to importing a single computer. The subsequent IMF-monitored reforms unleashed private enterprise and set the nation on a new, high-growth trajectory.
A decade later, India weathered the 1997 Asian Financial Crisis, largely insulated by its cautious approach to capital account convertibility—a policy that had been criticized but proved to be a vital buffer. Then came the 2008 global financial crisis. As the banking systems of advanced economies crumbled under the weight of toxic assets, India’s well-regulated financial sector stood firm. Combined with a strong domestic consumption base and decisive fiscal and monetary stimulus, this resilience allowed India’s GDP to grow by 8.5% in FY 2009-10, even as many OECD nations were in deep recession.
Each of these shocks, though painful, forced India to build new economic muscle and shed outdated orthodoxies. The current tariff showdown is shaping up to be another such inflection point—a trigger for accelerating a preplanned but slow-moving agenda to build a more robust, self-reliant, and globally competitive India.
THE DOMESTIC PIVOT: FROM SHORT-TERM PAIN TO LONG-TERM GAIN
The short-term pain is undeniable. The US market absorbs nearly 18% of India’s total merchandise exports. Key sectors like electronics, pharmaceuticals, engineering goods, and apparel, which collectively account for over 40% of exports to the US, face an immediate loss of competitiveness. For the thousands of Small and Medium-sized Enterprises (SMEs) that form the backbone of these supply chains, the impact is severe. These firms, which often operate on razor-thin margins and employ millions, lack the capital reserves and market diversification of larger conglomerates to easily absorb such a shock.
Beyond immediate relief measures, however, the tariffs are powerfully accelerating the “Aatmanirbhar Bharat” (Self-Reliant India) mission. This is not a call for autarky, but a strategic imperative to build domestic capacity, thereby enabling India to integrate with global value chains from a position of strength rather than dependence.
The cornerstone of this strategy is the Production-Linked Incentive (PLI) scheme. As of early 2025, this ambitious program has attracted over Rs 2.7 lakh crore ($32 billion) in committed investments across 14 key sectors. Its design is clever: instead of offering vague subsidies, it rewards companies with direct financial incentives based on incremental sales, encouraging long-term capital investment and scale. With US market access now more expensive, the economics of producing locally under the PLI umbrella for both the vast domestic market and other export markets becomes significantly more attractive.
The results are already validating the model. Mobile phone manufacturing, a flagship success, has seen India transform from a net importer into the world’s second-largest producer. Exports are projected to cross $15 billion in FY 2024-25, a staggering tenfold increase since the pre-PLI era. But the story extends further. In pharmaceuticals, a PLI scheme for Active Pharmaceutical Ingredients (APIs) is directly aimed at reducing India’s critical dependence on China for the raw materials of its world-leading generics industry. Similarly, in the automotive sector, PLI is fostering ecosystems for electric vehicle components and advanced battery manufacturing, positioning India for the next generation of mobility.
GLOBAL REBALANCING: DIVERSIFYING MARKETS AND ALLIANCES
The trade dispute starkly reveals the vulnerabilities of over-reliance on Western markets. Currently, the US and the EU together account for over a third of India’s merchandise exports. This concentration of risk is no longer tenable. Consequently, India is pursuing a multi-pronged diversification strategy with unprecedented urgency.
The “Look East” policy has evolved into a robust “Act East” reality, with India aggressively pursuing deeper integration with ASEAN, a bloc with which trade has already surpassed $130 billion annually. Beyond traditional goods, there is a major push to export digital services, UPI-based fintech solutions, and affordable pharmaceuticals to this fast-growing region.
Simultaneously, India is strengthening its ties with the Middle East. The Comprehensive Economic Partnership Agreement (CEPA) with the UAE, signed in 2022, has already boosted non-oil trade significantly, establishing the UAE as a strategic gateway for Indian goods to reach markets in Africa and Europe. In parallel, engagement with Africa—a continent of 1.4 billion people—is being framed as a long-term strategic partnership, built on development cooperation, lines of credit for infrastructure, and growing trade in vehicles, engineering goods, and IT services.
This economic pivot is occurring in lockstep with a geopolitical realignment. As trade relations with Washington face turbulence, India is visibly strengthening its role within forums like the Shanghai Cooperation Organisation (SCO) and BRICS. This is not merely diplomatic posturing; it involves creating parallel financial structures, such as promoting trade settlement in local currencies to reduce reliance on the US dollar. This pragmatic engagement is underscored by data: bilateral trade with Russia, for example, surged to nearly $70 billion in FY 2024-25, largely driven by energy imports that have stabilized domestic inflation. This commitment to “multi-alignment” allows India to cooperate with the US-led Quad on maritime security while simultaneously pursuing its own economic and energy security interests elsewhere.
A PRECEDENT FOR TURNING PRESSURE INTO POWER
For a powerful example of turning external pressure into internal strength, one need only look at China. Following the Tiananmen Square incident in 1989, China faced a barrage of Western sanctions, including a freeze on World Bank loans and bans on technology transfers. Beijing’s response was not to retreat, but to launch its famous “Southern Tour” in 1992, signaling a radical acceleration of market reforms. It aggressively built up its Special Economic Zones, courted foreign investment, and focused on becoming the world’s workshop. The result was historic: despite sanctions, China’s economy grew at an average annual rate of over 10% through the 1990s. India now has the opportunity to use this external shock to fuel a similar, albeit democratic, internal transformation.
THE STRATEGIC OPPORTUNITY
Navigating the immediate disruption will require immense skill and resilience. However, the current tariff crisis is compelling India to make necessary long-term changes at an accelerated pace. This forced evolution is critical if India is to achieve its goal of becoming a $7 trillion economy by 2030.
By strengthening domestic manufacturing, India can create millions of high-quality jobs for its young population. By diversifying its export markets, it can insulate its economy from the political shifts of any single nation. By embracing a multi-aligned foreign policy, it can enhance its strategic autonomy. When future historians look back, they may conclude that these tariffs were not remembered for the disruption they caused, but for the profound economic transformation they set in motion.
Brijesh Singh is a senior IPS officer and an author (@brijeshbsingh on X). His latest book on ancient India, “The Cloud Chariot” (Penguin) is out on stands. Views are personal.
