India-US digital trade policy braces for Liberation Day tariffs

By Krishan Arora

When the US President Donald Trump reintroduced his signature “reciprocal tariffs” policy in early 2025, the global trade landscape began shifting once again. At the heart of this disruption lies a core contradiction: the clash between the United States’ demand for tariff parity and the inherent asymmetries in economic development between countries like the US and India.

While the broader impact on traditional sectors like textiles, agriculture, and pharmaceuticals has been widely discussed, the more strategic consequences lie deeper—in India’s digital economy, electronics manufacturing, satellite communication (satcom), and space technology sectors. These are the growth engines of a modern economy, and the trade tensions now unfolding may well determine how successfully India positions itself in the next wave of global innovation.

A Digital Economy Caught in the Crossfire

India’s digital transformation is at an inflection point. With 5G rollouts expanding and the groundwork for 6G and advanced AI systems being laid, India is increasingly reliant on cross-border trade for high-end semiconductors, optical components, network equipment, and smart hardware. Much of this originates from countries like Japan, Taiwan, and the US.

If the Trump administration’s reciprocal tariffs extend to components that power India’s communication networks—routers, base stations, fibre-optic modules, or semiconductor-grade tools—the cost of deploying next-gen digital infrastructure could rise sharply. This not only threatens affordability and access but also undermines India’s push for Digital Public Infrastructure (DPI), a model many developing nations are looking to replicate.

Moreover, as the Indian IT sector continues to be a critical export engine, non-tariff trade barriers—such as visa restrictions under a protectionist regime—could weaken India’s global tech services footprint. Tightening H-1B visa norms could affect Indian IT professionals, disrupting the services export value chain. The commentary here is clear: even in an era of digital flows, old-fashioned tariffs and regulatory hurdles still matter, especially when layered over geopolitical concerns.

Tech-side Tremors from Tariff Retaliation

• Digital infra cost spike: Tariffs on US telecom and semiconductor inputs could inflate 5G and data centre buildout costs, affecting India's DPI ambitions.
• Manufacturing at risk: Higher prices for imported hardware like precision tools, chipsets, and network gear may delay timelines for Make in India-linked tech projects.
• Export headwinds for IT: Services exports may face indirect stress if H-1B restrictions intensify, impacting onsite delivery and enterprise IT contracts.
• R&D and fab impact: Import hurdles on advanced machinery and raw materials could slow progress in India's nascent semiconductor ecosystem.
• Diversion of global capital: If uncertainty persists, investor sentiment in Indian tech infrastructure may cool, redirecting funds to less risky regions.

Hardware Manufacturing and Make in India Paradox

India’s import substitution strategy, as embodied by the Production Linked Incentive (PLI) schemes and the Manufacturing and Other Operations in Warehouse Regulations (MOOWR) framework, is built on encouraging domestic value addition in mobile handsets, electronics, semiconductors, and telecom gear. However, the success of these initiatives depends on the ability to import critical inputs at competitive rates—be it fabless chip designs, advanced lithography machines, or proprietary tech IP from US-based firms.

Should the US mirror India’s higher tariffs on such goods—or worse, use national security clauses to restrict exports—India’s hardware ambitions could face a double whammy: rising input costs and slowing access to core technology. In FY24 alone, India imported over USD 19 billion worth of electronic components from the US and its allies.

To avoid this, India must strategically calibrate its tariff regime. For example, lowering duties on high-end US electronics and machinery could unlock technology transfers and secure reciprocal gains—like improved market access for India’s electronics exports and reduced duties on Indian-made laptops, wearables, and IoT devices. These could be part of a wider technology corridor and investment agreement being considered in the upcoming Bilateral Trade Agreement (BTA).

This approach would also strengthen India’s argument that while its tariffs protect infant industries, they are not protectionist per se, but part of a developmental strategy. Smart tariff concessions can reinforce this narrative. Simultaneously, India could use this opportunity to attract clean tech and semiconductor investments under its national semiconductor mission, especially as the US government, under the CHIPS and Science Act, is also looking to diversify its fabrication ecosystem.

Satcom and the New Space Economy: A High-Stakes Frontier

Perhaps the most underdiscussed yet high-impact implication of reciprocal tariffs is in the satcom and space tech sectors. As India opens up its space economy—with initiatives from ISRO’s commercial arm NSIL (NewSpace India Ltd), and the Indian National Space Promotion and Authorization Center (IN-SPACe)—private players are increasingly reliant on foreign collaborations for components such as sensors, propulsion systems, advanced alloys, and onboard electronics.

The US is a critical supplier of many of these high-tech items. A tariff escalation here could deter investment in India’s emerging private space ventures and slow the pace of satellite broadband deployment—a key enabler of rural connectivity. With major global satcom players including Starlink, Amazon Kuiper, and OneWeb looking at India as a potential growth market, any frictions in import-export regulation could derail momentum.

Conversely, Indian satellite firms have growing ambitions to serve international markets with affordable small satellite constellations and launch services. Companies such as Skyroot Aerospace and Pixxel are already seeking global contracts. Here, retaliatory US tariffs could curtail their ability to scale, unless trade agreements explicitly carve out space technologies as a strategic area of cooperation.

India must thus ensure that satcom and space tech are central themes in any Bilateral Trade Agreement (BTA) with the US. Joint ventures in launch technologies, spectrum coordination, satellite manufacturing, and even lunar exploration could form a new axis of strategic collaboration—so long as trade policy aligns with vision.

Turning Disruption into Opportunity

While protectionist in spirit, the Trump tariffs offer India a rare opportunity to rethink how trade policy can support its strategic tech sectors without capitulating to sovereign interests.

A win-win approach would involve selective tariff rationalisation on high-value US-origin technology imports such as medical devices, AI hardware, and advanced telecom systems. These concessions could be strategically traded for improved access for Indian electronics and IT exports in the US market. At the same time, India and the US should engage in negotiated technology partnerships in semiconductors and satellite communication, where India is not merely looking to import components but aiming for deeper collaboration in joint research, intellectual property sharing, and co-development of next-generation systems.

Furthermore, India must work towards securing exemptions for its software services and cloud infrastructure exports, which are often disproportionately affected by non-tariff barriers like restrictive visa policies and data localisation regulations. Finally, the two nations should look at coordinated industrial policies encouraging greater US investment in India’s technology parks, satellite clusters, and digital hubs. This would help address trade asymmetries not just through goods exchange, but via enhanced capital flows and deeper value-chain integration.

What India Should Do?

• Leverage tariffs for tech access: India should use tariff cuts on high-end US imports—like semiconductor tools and AI hardware—as bargaining chips for deeper market access for its electronics, software, and telecom exports.
• Push for digital reciprocity: India must negotiate for relaxed non-tariff barriers on digital services, including streamlined visa regimes and recognition of Indian cloud and cybersecurity certifications.
• Secure co-investment in core tech: Trade talks should prioritise US participation in India’s semiconductor and electronics missions through joint R&D, technology transfers, and fab investment.
• Negotiate beyond tariffs: Broader trade-offs should include collaboration in AI, quantum, and space tech, and not just focus on duty parity—opening new avenues for joint innovation.
• Balance defence buys with digital dividends: Defence and LNG imports can be used as strategic levers to unlock concessions in telecom infrastructure, electronics, and satcom partnerships.

The Road Ahead: Towards Mission 500

As both nations work toward the ambitious Mission 500—to boost bilateral trade to USD 500 billion by 2030—the focus must shift from transactional trade rows to long-term strategic alignment. This includes collaborative frameworks in supply chains, AI ethics, digital standards, and quantum computing.

India’s commitment to reforming its tariff structures—evident in the recent reduction of import duties on electronics, medical devices, and luxury motorcycles—is a positive step. However, any further concessions must be linked to tangible reciprocal benefits, particularly in sectors where India has global competitiveness. At the same time, India is diversifying its sourcing strategies, increasing apple imports from Turkey and almonds from Australia to reduce dependency on US goods, while also pursuing Free Trade Agreements (FTAs) with the EU and the Middle East.

The future of India-US trade relations will not be written in tariff schedules alone. It will be shaped by the extent to which both countries can align their economic strategies with the shared vision of an open, innovation-led digital future. India’s ability to protect key sectors while negotiating strategic market access—particularly for labour-intensive exports like textiles, generic pharmaceuticals, and software services—will be key to sustaining growth.

By integrating smart trade diplomacy with industrial policy, India can turn the challenge of reciprocal tariffs into a catalyst for high-value collaboration, not conflict.

The author is a Partner and India Investment Advisory Services Leader at Grant Thornton Bharat.