India shifts to damage control after Trump ratchets up threats

India’s government is scrambling to contain the economic fallout from President Donald Trump’s threatened tariff action, which has left officials in New Delhi reeling on how to respond.

Trump’s latest tirade caught officials in India’s capital off guard. The president’s language — calling India’s economy “dead,” its tariff barriers “obnoxious” and saying India is indifferent to the plight of Ukrainians — has been very atypical and akin to a verbal slap in the face, an official in New Delhi said, asking not to be identified as the discussions are private. Officials have no template to deal with these kinds of public assaults, the person said, adding that the latest turn of events has put a strain on India’s relationship with the U.S.

India’s government is now bracing for tariffs of 25% or more on exports to the U.S. and is seeking to limit the possible economic damage. The Ministry of Commerce and Industry is discussing ways to help exporters who would be hardest hit, such as in the gems and jewelry and textile sectors. Prime Minister Narendra Modi has been urging Indians to buy local goods to offset any slump in global demand. And officials say they will continue to seek back-channel talks to help ease the tensions.

Trump has ramped up his fight against India, threatening to impose tariffs “substantially” higher than 25% on the nation’s exports to the U.S. to penalize it for buying oil from Russia. Trump’s aides say energy purchases by countries like India and China are helping to keep Russia’s economy afloat as its leader Vladimir Putin wages war with Ukraine. The U.S. president has given Putin until Aug. 8 to reach a truce in the conflict.

Modi’s government is so far holding its ground, saying it’s being unreasonably targeted by the U.S. for its ties to Russia — its biggest supplier of oil and military equipment. Officials have signaled they won’t instruct refiners to halt Russian crude purchases, while Modi has urged Indians to buy more local goods to bolster Asia’s third-largest economy.

For months trade officials had been negotiating with the Trump administration on a deal that both sides had been signaling was close to being finalized, with a tariff rate possibly below 20%. The U.S. president’s tone appeared to change last month, when he threatened India with higher duties alongside others in the BRICS bloc of nations for what he said was the group’s anti-U.S. stance. He then followed up several days later with warnings about financial penalties on countries like India for buying oil from Russia.

India has been buying Russian crude at a rate of about 1.7 million barrels a day so far this year, all of it from seaborne imports, while China has purchased an average of about 2 million barrels, comprising both seaborne imports as well as oil that’s transported via an inland pipeline.

To offset the tariff hikes, officials in New Delhi are now considering expediting an export promotion plan, first outlined in the February budget, which set aside 22.5 billion rupees ($256 million) to support exporters. The budgeted amount may be increased to help businesses offset potential losses resulting from greater competition with regional rivals, who have secured lower tariff rates of around 15%-20%, a person familiar with the matter said.

The discussions are still ongoing and the government hasn’t made any decision on what kind of support it will provide, the person said.

India’s Ministry of Commerce and Industry and Ministry of Finance didn’t immediately respond to emails seeking further information.

New Delhi is also weighing easing some dairy market access rules for the U.S. in order to placate Trump, officials familiar with the matter said. The government is discussing whether it can allow limited imports of some dairy products, such as cheese not made in India and condensed milk with clear labeling of the animal feed used in manufacturing, they said.

India maintains tariffs of as high as 60% on dairy products to protect its local industry and enforces strict rules to ensure imported dairy products aren’t from cattle fed animal-based in order to adhere to religious sensitivities. Any easing of restrictions in the dairy sector would represent a significant concession by India, which didn’t grant the UK any similar market access in a recently concluded free trade agreement.

Economists estimate that a 25% tariff could cut India’s gross domestic product growth by 0.3 percentage point. Pranjul Bhandari, chief India economist at HSBC Holdings Plc., said an additional penalty would curb growth further, resulting in lower capital inflows and investment. An internal assessment by the Ministry of Commerce and Industry shows that a 25% tariff would impact about 10% of India’s exports in July to September.

Modi’s rivals have criticized his previously friendly ties with Trump and called him out for his silence on the U.S. leader’s comments.

“We are receiving threats - that there will be more than 25% tariffs and we are being told that we should not buy oil from Russia. This friendship has turned out to be expensive,” Jairam Ramesh, a senior leader in the main opposition Indian National Congress, told reporters Tuesday.

Trump’s actions will push India to react, although it’s unlikely to retaliate and will more likely seek further talks with the U.S., said Indrani Bagchi, chief executive officer at Ananta Centre, a Delhi-based think tank.

“My sense is the government will contain this and will not take this forward, will not escalate,” she said. India will want to continue the trade deal negotiations in spite of Trump’s “personal anger,” she said. The U.S. president likely wants to have Modi call him and “fold in the way that other countries have,” she said. “That is not India’s style.”