Beyond the Red Sea, the 2024–25 period has been marked by persistent geopolitical instability, including the ongoing Russia-Ukraine conflict and tensions in the Middle East, which have compounded supply chain unpredictability. “The Russia-Ukraine conflict has significantly reduced the export of essential commodities like grain, fertilisers, and energy products from both countries, leading to shortages and price increases. Sanctions on Russia have complicated logistics and transportation routes, affecting various industries, including semiconductors, energy and automotive. These disruptions have forced businesses to find alternative sources and adapt to new trade dynamics, further straining global supply chains,” says Hardik Shah, Director, CareEdge Ratings.

The 2025 J.S. Held Global Risk Report underscores the growing severity of risks linked to climate change, natural disasters, cyberattacks, and evolving regulations. One notable example is the 2023 drought that affected the Panama Canal, causing major delivery delays and driving up costs for goods transported between the US, Asia, and other global markets. Goyal explains, “Cybersecurity breaches and fraud have also emerged as critical threats, with the interconnectedness of global supply chains making them more susceptible to systemic shocks. Regulatory scrutiny has tightened, especially in the European Union, where new legislation enforces greater transparency and compliance in sourcing and manufacturing practices. These factors collectively underscore the fragility of global supply networks and the urgent need for Indian manufacturers to invest in resilience, digitalisation, and alternative sourcing strategies.”

The recent conflict between India and Pakistan also added to trade and supply chains disruption. “Both countries have imposed mutual restrictions on direct trade, bans on transshipment, port restrictions, and the closure of airspace to each other's aircraft effectively shutting down vital trade corridors. Geopolitical instability in sensitive areas can disrupt supply chains, affecting both domestic production and international trade. Nations like China, Turkey, Azerbaijan and Iran, which have shown diplomatic and military support for Pakistan, are facing increased scrutiny and pressure from the international community,” says Shah.

US tariff disruption
In a major policy shift, US President Donald Trump signed executive orders imposing reciprocal tariffs on around 60 countries, disrupting global trade and supply chains. Aimed at correcting trade imbalances, these tariffs have raised the cost of imported goods and strained ties with key trading partners. Several affected nations have responded with retaliatory measures, further complicating global trade dynamics. While the direct impact on India may be limited, the broader indirect effects could be more pronounced, as rising uncertainty and slower global growth weigh on international markets.

The US government’s imposition of 25% tariff on steel and aluminium and their products, effective March 12, 2025, has put in jeopardy exports of engineering goods from India. “In the first ten months of FY25, engineering exports performed strongly, registering growth close to 8.9 per cent—placing us well on track to meet our internal target of 10 per cent. This growth was driven by broad-based performance across most sectors. Notably, exports of iron and steel products, auto components, industrial and electrical machinery, and pipes all witnessed robust demand. However, in February and March 2025, there was a noticeable dip owing to the imposition of new tariffs by the US, particularly on steel and related products. This led to uncertainty in the global market and a slowdown in shipments, ultimately impacting our ability to meet our target of $ 118 billion. Despite this, the industry achieved a record-high export figure of $ 116.7 billion, which remains the highest ever recorded,” states Pankaj Chadha, Chairman, EEPC India.

The new US tariff policy poses significant challenges for Indian exporters. “Key sectors like textiles, engineering goods, and electronics will be hit hard, as price-sensitive buyers may switch to domestic or alternate sources. This blanket hike violates the US' WTO commitments and signals a retreat from rules-based trade, injecting uncertainty into long-term export planning. Adding to the challenge is the unpredictability of future trade actions—President Trump has a track record of abruptly introducing new tariffs. This policy instability discourages new investments and contracts from Indian firms targeting the US market,” observes Ajay Srivastava, Founder, Global Trade Research Initiative (GTRI).

The US has imposed an additional tariff under Section 232 of the US Trade Expansion Act on Indian exports. Chadha says, “Section 232 tariff impacts exports of steel & aluminium products, and auto components. Indian exports affected include $ 5 billion in steel and aluminium products, and $ 2.5 billion in auto components. This totals $ 7.5 billion—about 39 per cent of India’s $ 19.17 billion engineering exports to the US—now subject to a 25 per cent tariff. While this tariff is global, earlier exemptions granted to countries like the EU, Korea, Brazil, and Japan have been revoked. India has taken up the matter at the WTO and has submitted a retaliatory tariff proposal. If no resolution is reached within 30 days, India may proceed with implementing retaliatory measures.”

On March 26, 2025, the US announced a 25 per cent tariff on critical imported automobile components—including engines, transmissions, powertrains, and electrical parts—with enforcement beginning May 3, 2025. Earlier, these parts exported from India were subject to a 2.5 per cent import duty. It is estimated that approximately 65 per cent of India’s auto component exports to the US now fall under this higher tariff bracket.

According to ICRA, revenue growth for the Indian auto component industry—based on a sample of 46 companies accounting for over ?3 trillion in FY2024 revenues and approximately half of the sector—will moderate to 6–8 per cent in FY2026, down from the earlier estimate of 8–10 per cent. This downward revision is primarily due to an anticipated mid to high single-digit decline in exports to the US, driven by tariff-related pressures. The recent surge in US import tariffs is expected to impose around ?90 billion in additional costs across the supply chain, which will be borne collectively by US consumers, importers, and Indian exporters. The extent to which Indian exporters absorb these costs will depend on their competitive positioning and the price sensitivity of their products.

North America (including the US) is one of the most important markets for Indian auto components industry with annual exports of nearly $7 billion. “The tariffs on auto components became effective from 3 May 2025. These are a concern, particularly because competitiveness in global trade is a relative issue. While Chinese auto parts also face a 25 per cent tariff under this announcement, they are further impacted by an additional 20 per cent under the IEEPA provisions, totalling 45 per cent. In contrast, Mexico continues to benefit from zero tariffs under the USMCA (US-Mexico-Canada Agreement). Our Tier 1 suppliers may face less impact due to a 3.75 per cent rebate vehicle manufacturers receive, but Tier 2 and aftermarket players could face challenges. It is still early to assess the full impact (as the US tariff regime is at this juncture very fluid). We remain hopeful that the Indian Government’s negotiations on a bilateral trade agreement (BTA) with the US will yield favourable terms, ideally under a 0-for-0 tariff model,” says Mehta.

The silver lining
India could see opportunities in the medium term owing to its cost advantage over Chinese components, assuming current tariff levels remain unchanged. Several industry players have noted a recent uptick in inquiries from US importers. “India’s direct export loss from higher tariffs could be limited to around $ 9-13 billion, which is 0.2-0.3 per cent of its GDP. India’s domestically driven economy may offer some resilience. Additionally, India’s lower reciprocal tariffs could offer a competitive advantage over other Asian exporters. Moreover, services exports are so far not directly impacted by the trade war and should continue to support India’s external sector,” explains Shah.

Amid challenges, there is a limited silver lining for Indian merchandise exporters. Srivastava adds, “Since the new 10 per cent tariff is applied globally (except for already high-tariff sectors like steel, aluminium, and autos), India is not uniquely disadvantaged. All major exporters to the US—including Vietnam, and the EU—face the same baseline hike. This levels the playing field, at least temporarily. While the new US tariffs are a setback, they could also serve as a wake-up call to reduce overdependence on the US and strengthen India’s position in other global markets.”

With global companies looking to diversify their supply chains away from China, India has the opportunity to emerge as a key alternative. “This shift is expected to boost India’s manufacturing sector significantly. India’s trade policies and agreements with other countries will also play a crucial role. Strengthening ties with countries like the US, Japan, and Australia through initiatives like the QUAD will open new markets and opportunities,” explains Shah.

So, will the recent US-China tariff truce (i.e. agreement to drop their punitive tariffs for the next 90 days) hurt India's exports? Srivastava answers, “Yes, the temporary tariff truce between the US and China could blunt some of the gains India was expecting under the China Plus One strategy. Over the past few years, punitive US tariffs on Chinese goods—peaking at 245 per cent and averaging 145 per cent—had severely disrupted US–China trade. In response, China imposed retaliatory tariffs of up to 125 per cent, bringing bilateral trade to a standstill and creating space for alternative suppliers like India. The 90-day US-China agreement to sharply lower these tariffs—with the US cutting rates to 30 per cent and China to 10 per cent—signals a de-escalation and a possible revival of direct US–China trade. This reduces India’s short-term advantage in sectors where it had begun to fill the supply gap left by China, such as electronics, chemicals, and machinery.”

However, there is a flip side. He explains, “Stable US–China trade can reduce global supply chain disruptions and bring more predictability to global markets, which benefits Indian exporters indirectly. Additionally, deep-rooted trust issues between Washington and Beijing remain, meaning that India still has an opportunity to emerge as a long-term alternative if it strengthens competitiveness, improves ease of doing business, and leverages FTAs.”

India's top merchandise export items (FY 2023-24)

Source: NIRYAT, Ministry of Commerce, GOI

 The dumping headache

China is one of the largest low-cost manufacturers globally and has a history of high dumping at times in the global economies including India. The imposition of high reciprocal tariffs by the US China could result in flooding (dumping) of low-cost products in Indian and other export markets, negatively impacting certain sectors. The Government of India is alert to this risk. “Customs authorities have been advised to monitor imports, and the Commerce Ministry has urged industry bodies to report unusual surges. So far, there is no evidence of dumping in the auto component sector. India has historically been proactive in imposing safeguard and anti-dumping duties where necessary,” says Mehta.

Trade with China constitutes more than 40 per cent of India’s total trade deficit, and the influx of low-cost, often substandard Chinese products continues to dominate the unorganised retail sector, undermining domestic MSMEs. Goyal says, “Despite anti-dumping duties, issues such as misclassification of imports and lax enforcement persist. The Directorate General of Anti-Dumping has been urged to rationalise duties and align them with current domestic production costs, while the Directorate of Revenue Intelligence faces resource constraints in checking illegal imports and smuggling. The persistence of these challenges not only impacts MSMEs but also distorts the competitive landscape, making it imperative for India to strengthen its anti-dumping frameworks and enhance border surveillance.”

Uncertainties anywhere are not good for business everywhere. India’s manufacturing sector too faces several pressing challenges amid global uncertainty that threaten both competitiveness and long-term growth. Tarun Khulbe, CEO, Jindal Stainless Limited (JSL), says, “As the Trump administration has announced 10 per cent blanket tariffs on all countries, this has created a level playing field for India in many sectors including stainless steel, as India will no longer be at a disadvantage compared to other countries. However, this is a double-edged sword for certain sectors, as countries like China will look to dump material into other countries to make up for the deficit.”

He adds, “In India, this will lead to a surge in low-priced imports, particularly from China and Vietnam, which together account for nearly 70 per cent of India’s stainless steel imports as of this moment. Many of these imports are dumped at below-market prices, undermining domestic producers. In some cases, Chinese goods are being rerouted through Vietnam and other ASEAN countries with whom India has free trade agreements to bypass India’s protectionist mechanisms. In fact, imports via Vietnam have surged by 176 per cent in FY25 YoY, highlighting how easily trade rules can be circumvented. At a time when global steel and stainless steel markets are already witnessing slow growth, this puts stress on the profitability of manufacturers and limits the sector’s ability to reinvest in innovation or scale.”

India: A viable alternative to China?
India is a country which has huge potential and despite global headwinds, there are many bright spots for Indian manufacturing. Gulati opines, “One of the biggest things working in our favor is the growth of the Indian economy itself – being the fastest-growing major economy in the world creates a strong domestic demand. Plus, the government's push in core sectors like mining, power, petrochemicals, steel, railways, and infrastructure is really laying the groundwork for more industrial activity. We are witnessing the China Plus One strategy play out, which is opening doors for us with companies in the US, Japan, Korea, and Europe, looking for alternative sourcing.”

India has the potential to position itself as a viable alternative to China, but it must address key areas of improvement to fully capitalise on this opportunity. Gulati says, “The ease of doing business is certainly one area that needs to be worked on. As a country, we have made some great strides, improving rankings from 142 to 63 in the last decade. But, when you look at countries like Vietnam and Thailand, who are ahead of us, it suggests that there is still room to make India better and more attractive for businesses.”

Recent indications of a temporary easing in US–China trade tensions have also raised questions about the likelihood of large-scale investments relocating to India. To turn strategic interest into tangible investment, India must swiftly tackle its structural challenges. Srivastava elaborates, “The foremost challenge is the lack of economies of scale. Unlike China, Indian manufacturing is fragmented, often limited to small and mid-sized enterprises operating below optimal capacity. To compete globally, India must foster large-scale, tech-driven production ecosystems, especially in sectors like electronics, chemicals, and machinery. Equally critical is reducing the cost of doing business. High input costs—ranging from raw materials and electricity to inland logistics—erode competitiveness. Streamlining the Quality Control Order (QCO) regime is also essential.”

Logistics is another critical factor—shipping costs from India are currently higher than those from China, posing a potential barrier for international buyers.

Despite these headwinds, there’s a silver lining: India is emerging as a trusted, stable manufacturing hub in the global supply chain realignment. Khulbe says, “As international companies seek to reduce dependence on China, India is gaining traction as an alternative manufacturing base, particularly in electronics, pharmaceuticals, textiles, and speciality chemicals. The Indian government has responded proactively with a suite of incentives. The Production-Linked Incentive (PLI) schemes introduced across 14 strategic sectors offer financial incentives to boost domestic production, attract foreign investment, and spur positive growth for related sectors.

Potential of India-UK FTA
The India-UK Free Trade Agreement (FTA), signed on May 6, 2025, represents a significant milestone in boosting Indian exports. Srivastava says, “The India–UK FTA offers targeted export gains rather than broad-based benefits. Currently, around 55 per cent of India’s exports to the UK—such as petroleum products and generic pharmaceuticals—already enter duty-free under MFN terms, so they won’t benefit from the agreement. However, the real opportunity lies in labour-intensive sectors like textiles, garments, footwear, and automobiles, which currently face UK tariffs ranging from 4 per cent to 16 per cent. These tariffs will now be phased out or significantly reduced, improving India's price competitiveness and potentially unlocking billions in new export orders.”

Khulbe comments, “With Brexit altering UK-EU trade dynamics, British buyers are actively diversifying supply chains. An FTA would position India as a preferred, cost-effective alternative to EU-based suppliers and alternatively would also give India inroads into the European market. With improved export prospects, domestic players are likely to invest more in technology and R&D, leading to more innovation and sector. This will lead to a more robust and resilient manufacturing sector that is also future-ready.”

By eliminating tariffs on 90 per cent of tariff lines-including textiles, leather, processed foods, gems, jewellery, and auto parts-the FTA reduces export costs for over 1.7 lakh MSME exporters. Goyal adds, “For instance, textile MSMEs, which account for 25 per cent of India’s $44 billion textile exports, now gain duty-free access to the UK’s £4 billion market. Additionally, the FTA introduces streamlined customs procedures, digital trade commitments, and social security exemptions for Indian workers in the UK, collectively enhancing competitiveness and profitability.”

However, it is important to acknowledge the asymmetry in gains. Srivastava explains, “The UK government’s own projections suggest that UK exports to India will grow faster than Indian exports to the UK. This is plausible—while UK tariff reductions affect goods already entering at low duties, India is committing to slash high import tariffs in sensitive sectors like wines, spirits, and automobiles, giving UK firms deeper market access. To fully realise the agreement’s potential, India must support its exporters through better logistics, faster compliance systems, and trade finance, or risk being outpaced by a more prepared UK export push into the Indian market.”

As the negotiations are currently ongoing to finalise details of the deal (such as product quotas, tariff concessions, and product classifications), the India-UK FTA is unlikely to take effect before FY 2026–27, observes Chadha.

Upcoming trade negotiations
To boost exports, India is negotiating preferential trade deals with the US and Europe. While the India-UK FTA maybe not be perfect, it establishes a framework to help promote global integration which is beneficial for the manufacturing sector. But every FTA must be evaluated on its unique strengths and opportunities. “While the India-US deal is a bilateral trade agreement (BTA) and not a full FTA, the India-UK FTA may serve as a useful framework for talks with the EU. However, each agreement is unique and shaped by the priorities of the counterpart. For instance, the UK has shown particular interest in auto and liquor, whereas the EU has been focused on items like steel, auto components, etc,” says Chadha.

In the ongoing discussion for the FTA, India has flagged EU’s Carbon Border Adjustment Mechanism (CBAM) as a non-tariff barrier. Meanwhile, the EU has extended steel safeguard duty until June 30, 2026 which has a major implication on Indian exports. Chadha says, “These duties, applied beyond certain country-specific quotas, impose a 25 per cent tariff on steel and related products after the quota is exhausted. The safeguard measure affects 28 steel-related items. Since quotas are based on historical trade volumes (set around seven years ago), India’s allocation is limited and gets exhausted on the first day of each quarter in some categories. This restriction significantly limits India’s ability to expand exports to the EU, which constitutes about 19 per cent of India’s total engineering goods exports.”

For India to secure effective and equitable trade agreements with major partners like the EU and the US, it must adopt a calibrated, interest-driven approach. Srivastava explains, “The top priority should be to safeguard sensitive sectors—notably agriculture, dairy, and automobiles—which support large sections of the population and are not yet globally competitive. Reckless tariff cuts in these areas could harm livelihoods and derail domestic manufacturing goals.”

The larger issue, according to Srivastava, lies in the broader trade environment and the structural asymmetries in the ongoing bilateral negotiations. “India’s primary concern is to safeguard its sensitive sectors, notably agriculture, automobiles, and pharmaceuticals, which are vulnerable to aggressive US market access demands. The US has also been pressing India to dilute its domestic regulations on intellectual property, data protection, and government procurement—areas where concessions could undermine public interest and policy sovereignty. A major hurdle is the lack of reciprocity. While the US continues to demand tariff cuts and regulatory relaxations, it shows little willingness to offer meaningful concessions in return—especially on visa liberalisation, services trade, or tariff reductions for key Indian exports like textiles, leather, and gems,” he elaborates.

Equally important is resisting pressure to make concessions on non-trade issues, such as government procurement, digital trade rules, and labour or environmental conditionalities, especially when these could hurt MSMEs or limit policy space. Srivastava explains, “India should also firmly protect its intellectual property regime, particularly the flexibilities in patent laws that ensure affordable medicines and technological access. Most critically, India must ensure that any FTA delivers balanced, reciprocal gains. Many deals, including the recent India–UK agreement, reveal an imbalance. Such outcomes must be avoided.”

India will have to adopt a strategic approach that balances economic opportunity with domestic development priorities. Khulbe says, “As a developing country with its aspirations and goals, mechanisms like the EU’s CBAM, which could unfairly penalise Indian exporters, must be negotiated carefully to allow for equitable climate action. Finally, India should ensure that all trade agreements support its long-term sustainable development goals. This includes demanding fair treatment for developing countries, pushing for climate finance and green technology access, and advocating for the protection of MSMEs and domestic players. This way, India can secure agreements that support its aspirations as both a global economic player and a developing nation.”

Improving competitiveness
According to Shah, automotive, chemicals, pharmaceuticals, textiles, and electronics are the key sectors within India’s manufacturing landscape. These industries, which contribute nearly 14 per cent to the country’s GDP, are poised for continued growth, supported by government initiatives, technological advancements, and rising foreign investments. India’s manufacturing trajectory over the next five years will be influenced by geopolitical shifts, raw material prices, and technological advancements:

Hard reforms for better performance
While experts see a lot of potential for growth in the Indian manufacturing sector by capitalising on domestic demand and the China Plus One, the global environment continues to be challenging. Chadha says, “We are cautiously optimistic. While uncertainties remain, especially around global tariffs and protectionism, we anticipate a modest growth trajectory, with exports of engineering goods estimated to reach approximately $ 120 billion in FY26, compared to $ 116.7 billion in FY25.”

Khulbe adds, “While the Indian manufacturing sector faces considerable challenges amid global instability, it also stands at a promising inflexion point. With continued policy support, strategic investments in infrastructure and technology, and a focus on upskilling the workforce, India has the potential to become a global manufacturing powerhouse.”

In short, India needs to take multiple measures to build a resilient, competitive manufacturing sector capable of capturing a larger share of global trade and driving sustainable economic growth in an uncertain world. Srivastava concludes, “India’s path to becoming a credible alternative to China lies not in policy slogans but in hard reforms—rationalising tariffs, investing in infrastructure, enabling scale, and ensuring regulatory certainty. Only then will India be able to anchor global value chains and attract sustained, high-value investments.”