Impact of Trump's tariffs ‘minimal' on India, say experts

Khaleej Times

06-04-2025

India, the world's fifth-largest economy, is poised to emerge relatively unscathed from a new torrent of tariffs under President Trump's 'Liberation Day' plan.
While the move has sparked concerns over potential disruptions in international commerce, experts argue that the impact of these tariffs on India's economic trajectory will be minimal, with a projected slowdown of just 20-40 basis points in the current financial year.
In the face of global trade headwinds, India's strategic positioning and policy adaptability may allow it to not only weather the storm but also capitalise on emerging opportunities. As the world navigates shifting trade dynamics, the fastest-growing major economy's expansion remains firmly on track, say economists.
More importantly, the nation's strong domestic fundamentals, coupled with lower tariff exposure compared to peers, may even allow India to turn this challenge into a strategic advantage.
Trump's measures, designed to enforce reciprocal trade terms, also target several major economies, including China, Brazil, Japan, and the European Union.
According to Goldman Sachs, the tariffs could increase the total effective tariff on Indian goods by 19.5 per cent, potentially reducing exports by $15 billion — approximately 0.4 per cent of India's GDP. While this figure may seem concerning at first glance, a deeper analysis reveals a more resilient outlook.
India's trade relationship with the US remains robust, with bilateral trade reaching $124 billion in 2024. Indian exports to the US accounted for $81 billion, while imports stood at $44 billion, resulting in a substantial trade surplus of $37 billion. The US is India's largest export destination, absorbing 18 per cent of total outbound shipments — a sharp rise from just 6.0 per cent in 2006. Given this strong trade foundation, the direct impact of reciprocal tariffs is expected to be limited.
Brokerage firm Motilal Oswal estimates that India's exports in the six most vulnerable sectors constitute only 1.1 per cent of GDP. Even under a worst-case scenario, where exports to the US decline by $3.6 billion (0.1 per cent of GDP), the broader economic repercussions would be marginal, it said.
This assessment is based on a tariff differential of 9.0 per cent and an export elasticity of -0.5, meaning that a 1.0 per cent increase in tariffs could reduce exports by just 0.5 per cent.
India's tariff burden remains significantly lower than that of other key trading nations. Under the new US regime, Indian goods will face a 26 per cent duty — on par with the EU (20 per cent) and Japan (25 per cent) but far below the rates imposed on China (54 per cent), Vietnam (46 per cent), Sri Lanka (44 per cent), and Bangladesh (37 per cent). This discrepancy positions India favourably in the global supply chain, potentially allowing it to attract trade diversion from higher-tariff competitors.
Sujan Hajra, chief economist at Anand Rathi Group, notes that India's economic resilience could turn this trade headwind into an opportunity. 'Even if US exports decline by 10 per cent, the hit to GDP would be limited to around 0.2 per cent,' he explains. 'With lower tariff rates than key peers and a modest impact on exports, India may even gain from supply chain shifts.'
Financial markets have responded optimistically to the developments. The Indian rupee appreciated by 34 paise against the US dollar in early trading following the announcement, buoyed by a weaker greenback and falling crude oil prices. Forex traders attribute this resilience to India's strong macroeconomic fundamentals and the limited direct impact of tariffs.
HSBC's global trade forecast suggests a broader slowdown in export growth — from 2.9 per cent in 2024 to 1.3 per cent in 2025-26 — driven by reduced US import demand and global trade uncertainty. However, India's domestic consumption and investment-driven growth model insulates it from severe external shocks.
The Federation of Indian Export Organisations (FIEO) acknowledges that US tariffs will affect Indian businesses but emphasises that India is better positioned than many competitors. 'We are in a lower tariff band compared to China, Vietnam, and others,' says Ajay Sahai, director-general of FIEO. 'While there will be an impact, we remain relatively well-placed.'
President Trump's remarks during his recent address highlighted India's historically high tariffs on American goods, which he claimed reached 56 per cent. In response, the US imposed a discounted reciprocal tariff of 26 per cent on Indian imports. Despite these tensions, India's long-term economic prospects remain strong.
Economist argue that while the new US tariffs introduce short-term uncertainties, India's economic fundamentals — strong domestic demand, a competitive export sector, and lower tariff exposure than peers — suggest minimal disruption. The IMF's January 2024 World Economic Outlook reaffirms India's status as the fastest-growing major economy, with projections indicating it could soon become the world's third-largest economy.