US tariff could shave 20-30 bps off India's growth this fiscal, say economists

New Indian Express

6 days ago

MUMBAI: The higher-than-anticipated 25% tariff on Indian exports to the US is a 20-30 bps downside risk to the growth forecast this fiscal unless the ongoing trade talks bring it down, say economists.
On Wednesday night, US President Donald Trump unexpectedly announced a 25% flat tariff on Indian goods from August 1, with an unspecified 'additional penalty' for India's energy and military purchases from Russia.
While economists at the British brokerage Barclays put the tariff impact on growth at 30 bps this fiscal, the RBI has pegged it at 6.5%, while foreign agencies like the IMF and the Asian Development Bank have pegged it marginally lower at 6.4% and 6.5% respectively.
'Taking into account the sectoral exemptions, we estimate the effective tariff rate at 20% and this will be a 20 bps downside risk to the growth forecast for this fiscal,' Japanese brokerage Nomura Securities economists Sonal Varma and Aurodeep Nandi said Thursday.
The 25% tariff, plus a penalty on Russian imports, could dent growth by 30 bps this fiscal, but the higher duty is unlikely to significantly affect the domestic demand-driven economy, said Barclays.
If the 25% tariff is implemented, the effective average US tariff on Indian goods will rise to 20.6% in trade-weighted terms, Barclays said, adding this is sharply higher than both the pre 'liberation day' tariff rate of 2.7% and the 90-day pause tariff rate of 11.6%. In contrast, India's import tariff on US goods is lower, at 11.6% in trade-weighted terms.
"We do not see the tariff threat impacting GDP growth meaningfully, at worst the impact is 30 bps. We expect final tariffs to settle in lower than 25%, as trade talks are on," the British brokerage said further.
The announced reciprocal tariff rate of 25% may be temporary and settle lower as negotiations will continue after August 1. However, the best-case outcome will still be a tariff in the 15-20% range, which is disappointing, considering India's more advanced stage of negotiations, Nomura said, adding, 'We maintain our FY26 GDP growth forecast at 6.2% but flag a downside risk of 20 bps. Exports to the US account for just 2.2% of the GDP, and include pharma, smartphones, gems & jewellery, industrial machinery, auto components, textiles and iron & steel; most of which will likely face margin pressure.'
With Vietnam facing a 20% tariff, India's tariff of 25%, or even 15% in the best case scenario, may not lead to major trade diversion opportunities in the near-term. But over the medium-term, India is expected to remain a beneficiary of the China plus one strategy as diversification is a bigger driver of this trend, Nomura said.
Echoing similar views, Moody's Analytics associate economist Aditi Raman said while the US is India's largest trade partner with 18% of total exports shipped into that market or 2.2% of the GDP, the economy is relatively more domestically oriented than most of the region and relies far less on trade.
"Pharmaceuticals, gems, and textiles are key sectors that are likely to be hit. A point of contention is market access to the key agricultural and dairy sector, which India has historically been reluctant to grant," Raman said.
In 2024, Indian exports to the US amounted to $80.8 billion, representing about 18% of total exports. Pharmaceuticals, gems and textiles are key sectors that stand to suffer should a 25% tariff get locked in. That said, the Indian economy is more domestically oriented than most in the region and relies far less on trade.
Top exports to the US, including electrical machinery ($12 billion, including smartphones), and gems & jewellery ($9 billion), now face tariff increases of just over 24 percentage points, compared with levels before April 2.