While hopes had run high in India ahead of the tariff pause deadline, the reality has turned out far worse than anyone feared. Initially the country was hit with a 25 percent tariff, putting it at a disadvantage compared other Southeast Asian nations that were set at 19 to 20 percent. Then, the U.S. administration doubled the tariff in retaliation for India’s reliance on Russian oil. The two sides are set to meet for another round of negotiations at the end of August. In the meantime, the 50 percent rate is set to kick in on August 27.
This latest trade development has had a chilling effect on business.
“At the moment, the deadline is what people are trying to meet for all orders that are there,” Chandrima Chatterjee, secretary general of the Confederation of Indian Textile Industry (CITI), told HGI. “But for the future, yes, it’s very grave at the moment, there’s no way we can access that market with that kind of a cost differential between other suppliers to that market.”
While existing orders had been negotiated with factories sharing costs, future orders are now “being stopped or on hold.”
Dr. Rajesh Bheda, who operates a consultancy in India that spans productivity, quality and CSR and works with manufacturing groups, sourcing companies and industry associations, told HGI the tariff is “catastrophic,” pointing to one of his clients with a 65 percent exposure to the U.S. is in a “distressed situation.”
“Now you’re looking at cancelations where you already invested money into the raw material, or you partly produced goods you’re sitting with. And if you don’t know what’s going to happen, because many customers have suddenly suspended the orders, put them on abeyance or hold, and it’s all in flux,” he said.
It’s the opposite position the country expected to find itself in. Before the pause ended, many there were anticipating a more favorable rate compared to its competitors.
“We were getting ready for expansion, expecting 10 percent to 15 percent tariffs under the U.S. deal,” Gautam Nair, director at Matrix Design and Industries Pvt Ltd, a subsidiary of India’s largest garment exporter Gokaldas Exports, told Reuters.
Siva Ganapathi, managing director of Gokaldas Exports, which produces for Gap, Walmart and JCPenney, was blunt in an interview with the Times of India, when discussing the situation. He characterized 20 percent as the new zero, which meant 25 percent “can be managed.” Even with that, he said, expect prices to go up and products to be dumbed down.
“But 50% is not a tariff, it is an embargo. We will lose business,” he said. Plus, he added India is not the only victim. The U.S. will find it difficult to replace the $5 billion worth of garments the country exports annually.
Not only are U.S. consumers potentially looking at fewer goods on shelves, what will be there will cost more.
While many factory owners were able to share costs on the blanket tariff rate during the pause, increases over that 10 percent will hit retail prices, Bheda said. “Up to 10 percent, people could have managed that also. If the orders are in the pipeline, okay, you ship them at cost. At least you’re getting back your money, if not a profit. But there’s no way such numbers can be accommodated, which means prices for the customers will definitely have to go up,” he stated.
While production companies in India were already working to expand to new export markets, building relationships like that takes time—something factories currently don’t have.
“We would probably see, unfortunately, many of the MSMEs with higher exposure to the USA go out of business, because it’s not going to be easy for them to quickly secure alternative orders from Europe or from the UK,” Bheda said. “People with high exposure and relatively lower financial strength, it’s a matter of couple of months.”
He said the situation is likely to result in “imminent closure in the immediate future.” The result, he said, in the state of Tamil Nadu alone could be 100,000 to 200,000 jobs lost.
While she declined to put a clock on any “grave scenarios” like this, Chatterjee agreed pivoting really isn’t an option at this point. “When your portfolio has anything above 10 to 15 percent to the U.S. market, it will be a very difficult thing to substitute that with either alternate markets or the domestic market,” she said.
Factories with operations in other countries are leaning into those facilities now, but Chatterjee said only a very small percentage of companies have that ability.
Pearl Global is offering to move production to its 17 factories in Bangladesh, Indonesia, Vietnam and Guatemala. “All the customers are already calling me. They want us to … shift from India to the other countries,” managing director Pallab Banerjee told Reuters in an interview.
Meanwhile, the publication reported that Raymond is looking to do the same with its factory in Ethiopia, and RichaCo Exports is exploring setting up operations in Nepal.
The trade war escalation hits India at a time when the country had been focused on amping up exports and bolstering areas in which it was weak. And those efforts had started to pay off, making the tariff blow all the more detrimental. “We were creating higher capacities and as a result, large American companies like Walmart and Amazon, they were committed to increase their sourcing out of India and newer investors were coming into the country,” Bheda said. “So, exposure compared to earlier was more.”
Bheda said this will cause a “big jolt” to investors, who many now look elsewhere or at the very least, put plans on hold. “Many of the larger groups have already said that they’re looking at quickly trying to pivot business to some of the neighboring countries with favorable tariff situations.”
Chatterjee is more optimistic about long-term projects, particularly those that meet specific needs. “A large part of our focus today is in the technical textile space. So those being a little more niche and specified markets, that may have a little different growth trajectory [and] not be too impacted.”
With the way tariffs have been running hot and cold thus far, many are still hoping for a quick resolution. “Everybody is looking at some hope within this month,” Chatterjee said.
While Robert Antoshak, vice president, global strategic sourcing and development, at Grey Matter Concepts sourcing company which is currently building a new factory in Tirupur, said on LinkedIn that buyers are currently “scrambling for alternatives in Vietnam, Bangladesh, and Guatemala,” he thinks the crisis point will be resolved soon. “My bet? We’ll see tariffs cut to the 15 to 20 percent range by late September.”
While Bheda, too, is hopeful for a swift end to the strife, he’s also looking to U.S. companies to honor their roles in the partnerships with their factories. “I would assume that the larger international customers will also keep in mind while taking their decisions that ultimately, these are the people who have contributed to their production for a long time, and there’s a certain amount of responsibility they have towards these people.”
