Context: The U.S. Senate has passed the Lindsey O. Graham Sanctioning Russia and Iran Act, 2026, which proposes sanctions and additional trade restrictions linked to Russia.
- A key provision authorises tariffs of up to 100% on countries among the five largest importers of Russian crude oil or natural gas if they knowingly make new purchases after the law’s enactment.
- The Bill still requires U.S. House approval, but its potential impact on India is significant because of India's growing dependence on Russian crude.
India’s Russian Oil Dependence
- India has diversified its crude-oil sources to reduce its import bill and strengthen energy security amid global uncertainty.
- Before the Russia–Ukraine conflict, Russian crude accounted for only about 2% of India's crude imports; it has now risen to roughly 50%.
- In 2026, imports increased from 4.54 million tonnes (MMT) in January to 8.96 MMT in May.
- While Russian oil has helped India secure relatively advantageous energy supplies, greater dependence has created diplomatic and trade tensions with the U.S., which seeks to discourage such purchases.
Potential U.S. Tariff Exposure
- On July 24, the U.S. imposed forced-labour-related tariffs on 60 countries, including India, under Section 301 of the Trade Act, 1974.
- India was subjected to an additional 10% tariff, replacing the earlier 10% duty under Section 122, which had expired.
- If the proposed Russia sanctions legislation becomes law, India's cumulative U.S. tariff burden could potentially reach 110%.
- China could face tariffs of around 112.5%, as it is also a major importer of Russian crude.
- Such exceptionally high tariffs could significantly reduce the price competitiveness of Indian exports in the U.S., causing losses in exports, production and economic activity.
What is GTAP?
- GTAP (Global Trade Analysis Project) provides a global database and Computable General Equilibrium (CGE) model used to analyse the effects of trade policies and economic shocks.
- It captures interlinkages between countries, sectors, production, consumption and international trade.
- The study used GTAP to compare two possible scenarios for India.
Scenario 1: U.S. Sanctions
- The first simulation assumed a 110% U.S. tariff on Indian goods, while other countries faced forced-labour tariffs and China faced a 112.5% tariff.
- India's economic welfare could decline by nearly $47 billion.
- GDP, output, domestic demand, exports and imports all contract.
- Aggregate exports fall by 5.1% and imports by 5.2%, reflecting disrupted trade flows and weaker economic activity.
- The results indicate that prolonged tariff confrontation with the U.S. could impose substantial costs on India's growth and external trade.
Scenario 2: Export Diversification through India–EU FTA
- The second simulation retains the same U.S. tariff environment but assumes India successfully diversifies its exports, represented by a functional India–European Union (EU) Free Trade Agreement (FTA).
- India's welfare improves by $26.3 billion, despite the continued U.S. tariff shock.
- GDP turns positive, while sectoral output and domestic demand recover by around 1%.
- Aggregate exports increase by 3.1%, while imports rise by 2.6%, indicating greater integration with alternative markets.
- The simulation suggests that market diversification can substantially cushion the economic impact of U.S. trade restrictions.
Strategic Implication for India
- India may continue procuring Russian crude to safeguard energy security, but it needs to reduce excessive dependence on any single export market.
- The India–EU FTA illustrates how access to alternative markets could compensate for part of the losses arising from restricted access to the U.S. market.
- However, diversification is not a complete solution because alternative markets must have sufficient demand to absorb additional Indian exports.
Complementary Domestic Reforms
- Trade facilitation: Simplify customs and regulatory procedures to reduce transaction costs and improve export efficiency.
- Non-tariff barriers: Address regulatory and technical barriers that restrict Indian products' access to foreign markets.
- Logistics: Improve ports, transport infrastructure, warehousing and supply-chain efficiency to lower India's logistics costs.
- Product quality and standards: Strengthen compliance with international standards and move Indian exports up the value and quality chain.
- Market diversification: Expand India's presence across the EU and other emerging and developed markets, reducing vulnerability to geopolitical or tariff shocks in any one market.
Way Forward
- India's response should combine energy-security interests with export-market diversification rather than treating them as mutually exclusive.
- A broader export base, stronger domestic competitiveness and deeper trade integration can make India more resilient to geopolitical disruptions, sanctions and protectionist trade policies.
- The long-term objective should be to shift from dependence on a few major markets towards a diversified, competitive and resilient export ecosystem.
