Introduction
The impact of higher US tariffs on India will likely be more visible in employment losses than in GDP growth, according to S. Mahendra Dev, Chairman of the Economic Advisory Council to the Prime Minister (EAC-PM). In an interview, Dev highlighted that India’s economy—driven largely by domestic consumption and investment—remains resilient, but labour-intensive MSMEs face challenges that could hit job creation.
US Tariffs: Growth vs. Jobs
Exports account for only around 20% of India’s GDP, meaning the economy is not heavily export-dependent. However, tariffs on labour-intensive goods such as textiles, garments, gems & jewellery, leather, and seafood are expected to hurt MSMEs the most.
- GDP Outlook: RBI projects India’s growth at 6.5% in FY26.
- Jobs Outlook: MSMEs, which employ millions, may see job losses due to export slowdown.
“The impact will be less on growth and more on potential job losses,” Dev stressed.
Government Measures to Counter Impact
The government is engaging with stakeholders to cushion the effects of tariffs. Measures include:
- GST reforms to boost domestic consumption.
- Counter-balancing policies to aid MSMEs.
- Focus on ease of doing business and deregulation as core next-generation reforms.
Dev noted that over 40,000 compliances and 1,500 obsolete laws have already been scrapped in recent years.
Next-Generation Reforms: What’s Needed
Looking beyond tariffs, the EAC-PM Chairman outlined key reforms to drive India’s transformation into a developed economy by 2047:
- Ease of Doing Business & Deregulation – deeper reforms to reduce compliance burdens.
- Labour & Land Reforms – addressing the “missing middle” in manufacturing by enabling medium-sized firms to thrive.
- Disinvestment & Privatisation – scaling up ongoing efforts such as IDBI divestment.
- Agriculture Market Reforms – boosting productivity and reducing inefficiencies.
- State-Level Capacity Building – stronger execution at state level to accelerate growth.
Task Force & Vision 2047
The Prime Minister’s task force on reforms is expected to review taxation, labour, and agriculture policies. Its goal is to align laws and procedures with the vision of Viksit Bharat 2047 by reducing compliance costs for both domestic and export businesses.
MSMEs and Compliance Burden
MSMEs remain central to employment, growth, and exports. Despite multiple support measures, regulatory hurdles continue to slow down their expansion and innovation. Dev stressed that reforms must help MSMEs formalize, access capital, and integrate into supply chains.
Export Diversification Strategy
With the US tariffs in place, India is exploring new markets:
- Asia, Latin America, and Africa seen as high-potential regions.
- Free Trade Agreements (FTAs) under negotiation with the EU and others.
- Domestic Demand expected to absorb part of the supply through government-driven self-reliance initiatives.
GST Reform Debate
Planned GST rate restructuring could cause temporary revenue losses for states. The GST Council, which includes both Centre and states, will determine compensation. SBI Research estimates a ₹5.5 lakh crore consumption boost due to tax cuts and GST reforms, potentially lifting GDP by 0.6%.
Labour Market Flexibility & Missing Middle Problem
India’s manufacturing sector suffers from the “missing middle” — too many micro firms and very few mid-sized ones. Dev argued that labour reforms are essential to encourage firms to grow into 200–500 worker units, which could significantly boost productivity and formal job creation.
S&P Global Upgrade: A Positive Signal
India’s recent sovereign rating upgrade by S&P Global is expected to:
- Lower borrowing costs for Indian corporates abroad.
- Enhance foreign investor confidence and attract more FDI.
- Support India’s long-term growth trajectory despite short-term trade headwinds.
India’s share of global FDI stood at 2.1% in 2023, and inflows rose 14% in FY25 despite moderations in net FDI due to repatriations.
Conclusion
While US tariffs may temporarily strain labour-intensive MSMEs and employment, India’s economy remains anchored by strong domestic demand and structural reforms. With next-generation policies on deregulation, labour, GST, and investment flows, the long-term outlook remains resilient and promising.
