Tariffs and the M&A landscape in India: navigating a new trade reality

Gaurav G Arora
JSA, Gurugram
gaurav.arora@jsalaw.com

The tariff shock: a new trade paradigm

The reimposition of tariffs by the United States in 2025, including a 50 per cent ad valorem duty on selected Indian exports, has significantly altered India’s trade dynamics. These measures, framed as reciprocal tariffs, have placed Indian exporters at a competitive disadvantage compared to their peers in Vietnam, Bangladesh and Indonesia, who face lower tariff burdens. The impact is particularly acute in sectors like textiles, vehicle components, gems and jewellery and marine products, industries that are heavily export oriented and dominated by micro, small and medium enterprises (MSMEs).

Investor sentiment and deal valuations

Tariffs have introduced a new layer of uncertainty into the investment climate. For mergers and acquisitions (M&A) transactions, this manifests in several ways, as follows:

• depressed valuations: companies exposed to export markets, especially the US, are witnessing downward pressure on valuations due to reduced profitability and demand unpredictability;
• risk premiums and contingencies: investors are increasingly building tariff-related contingencies into deal structures, such as put options, earnouts and renegotiation clauses, to hedge against post-closing trade shocks; and
• sectoral divergence: while sectors like IT, pharmaceuticals and Fintech remain relatively insulated and continue to attract interest, others such as textiles and vehicle parts are seeing deal slowdowns and cancellations.

M&A trends: resilience amidst realignment

Despite the headwinds, India’s M&A market has shown remarkable resilience. In H1 2025, the country recorded deal values of approximately $50bn, with a notable rise in big ticket transactions exceeding $1bn.[1] Domestic deals accounted for 86 per cent of the volume, reflecting a strategic inward pivot amid global uncertainty.[2]

The power sector, particularly renewable energy, led the charge with $8.5bn in deal value, driven by India’s emergence as the fourth largest renewable energy market.[3] This shift towards sustainability and domestic demand-driven sectors is emblematic of a broader recalibration of investor strategies.

Cross-border M&A: a cautious outlook

Cross-border M&A, especially involving US-based acquirers or targets, is facing increased scrutiny and a cautious outlook. The tariff escalation has made US-based assets less attractive for Indian buyers and vice versa. Moreover, the unpredictability of trade policy under the current US administration has led to:

• delayed closures: deals are taking longer to close due to extended due diligence and regulatory reviews;
• a shift in target geographies: Indian companies are increasingly looking at Association of Southeast Asian Nations (ASEAN), European Union and Middle Eastern markets for acquisitions, seeking tariff-neutral jurisdictions; and
• strategic reshoring: some Indian companies are exploring acquisitions within India to internalise supply chains and reduce their exposure to external shocks.

Private equity and venture capital: risk recalibration

The tariff-induced uncertainty has also spilled over into the private equity (PE) and venture capital (VC) ecosystem. Reports suggest that pure play PE/VC investments have dropped by over 50 per cent year-on-year in tariff-exposed sectors. Key trends include:

• liquidity bottlenecks: extended holding periods and valuation mismatches are slowing down exits and fundraising;
• secondary market activity: investors are offloading positions at discounts, especially in regard to export heavy portfolios; and
• a domestic focus: capital is being redirected towards domestic consumption-led sectors and services, such as healthtech, edtech and Fintech.

Strategic realignments: the China+1+1 model

The geopolitical uncertainty has accelerated the evolution of the ‘China+1’ strategy into the ‘China+1+1’ model. Multinational corporations are now diversifying, not just in terms of China and India, but also to add a third low-tariff jurisdiction, such as Vietnam or Malaysia, to their manufacturing footprint. This diversification is influencing M&A strategies in several ways, as follows:

• supply chain acquisitions: companies are acquiring upstream or downstream partners in low-tariff countries to secure their supply chains;
• joint ventures and alliances: strategic partnerships are preferred over outright acquisitions to mitigate regulatory and geopolitical risks; and
• a localisation push: US-based companies are increasing domestic production to avoid tariffs, which may reduce inbound M&A interest in Indian manufacturing assets.

Policy response and the FTA imperative

India’s response to the tariff escalation has been measured. Rather than retaliate, the government is focusing on:

• expediting free trade agreements (FTAs): negotiations with the US and other key partners are being fast tracked to secure product-level exemptions and long-term tariff relief;
• providing support for MSMEs: financial interventions, such as export insurance, working capital support and technology upgrades, are being deployed to protect vulnerable sectors;
• strategic sector protection: India continues to safeguard critical sectors such as agriculture, dairy and MSMEs during trade negotiations, balancing liberalisation with socioeconomic priorities; and
• policy reform: India has reduced the applicable goods and services tax to boost domestic demand.

Conclusion: a new era of strategic M&A

Tariffs are no longer just trade instruments, they are strategic levers that influence capital flows, corporate strategy and geopolitical alignments. For India, the current tariff environment presents both challenges and opportunities. While certain sectors face headwinds, others, particularly those aligned with domestic demand, sustainability and digital transformation, are poised for growth.

M&A in India is entering a new era, one that demands agility, geopolitical awareness and a recalibrated approach to value creation. For dealmakers, the key lies in navigating this complexity with foresight, flexibility and a deep understanding of the shifting global trade architecture.

The views expressed in this article are the personal views of the author.