Fresh US tariffs could shave up to 30 bps off India's FY26 growth prospects, experts say

Mint

17 hours ago

New Delhi: India's economic growth in 2025-26 could be hit by another 20-30 basis points if US President Donald Trump's proposed additional 25% tariff hike on Indian goods takes effect later this month, economists cautioned.
The combined impact of Trump's total 50% tariff hike is conservatively projected to reduce India's FY26 GDP growth by 40-60 basis points, or 0.4-0.6 percentage points.
Indian exporters could be among the hardest hit by Trump's trade offensive when the additional duties kick in on 27 August, unless a breakthrough is reached during the ongoing 21-day negotiation window.
Benchmark indices Nifty 50 and Sensex dropped almost 1% on Thursday, but rebounded to end the day's session marginally higher on expectations that New Delhi can negotiate a better deal and as the overall impact on India's economy appeared manageable.
'Roughly half of India's exports to the US could be affected, especially from labour-intensive sectors like garments, leather, and gems and jewellery," said Madan Sabnavis, chief economist at Bank of Baroda. 'The impact on GDP may not be dramatic, but we could see growth closer to 6.2-6.3% in FY26," he said.
Goldman Sachs projected a similar 0.30 percentage point drag on India's economic growth if Trump's tariffs are fully implemented.
Sabnavis said the additional 25% levy would force Indian exporters to either absorb margin pressure or divert shipments to other markets. 'The government may then have to consider targeted support, especially for MSMEs (micro, small, and medium enterprises), which are large employment generators," he said.
Trump's latest salvo 'appears to be an effort to bring India to the negotiating table", Sabnavis said. "A deal could still emerge, potentially reducing the hike to 10-15%."
Exports to the US account for around 2% of India's GDP, so any disruption is likely to weigh on FY26 growth, added Devendra Kumar Pant, chief economist at India Ratings. However, shipments sent before 27 August and arriving at US ports by early September are expected to be taxed at the earlier, lower rate.
"We have already revised our FY26 growth to 6.3% from the earlier forecast of 6.6%. However, if both countries have a trade deal, the impact will be lower," Pant said.
A senior government official said it was too early to quantify the impact of the proposed US tariffs on India's FY26 growth, given that trade negotiations are still underway. 'Talks are ongoing, and it's premature to estimate the final impact on growth," this official said, requesting anonymity.
India is expected to resume talks this month on a bilateral trade agreement with the US, its largest trade partner.
Costly reverberations
Trump framed his additional 25% levy as retaliation for India's oil and defence ties with Russia and growing alignment with the BRICS bloc.
While India termed the additional tariffs 'unfair, unjustified and unreasonable", Prime Minister Narendra Modi asserted he was unwilling to offer concessions in agriculture and dairy.
'India will never compromise on the interests of farmers, fishermen and dairy farmers," Modi said on Thursday. 'I know personally I will have to pay a heavy price for it, but I am ready for it."
The Reserve Bank of India lowered its FY26 growth estimate to 6.5% from 6.7% in April, citing global trade and tariff risks following Trump's announcement of reciprocal duties that month.
Goldman Sachs, too, recently trimmed its real GDP forecast for India to 6.5% for calendar year 2025 and 6.4% for 2026.
'We had previously estimated a potential direct impact of around 0.3 percentage point (annualised) to India's real GDP growth, following President Trump's surprise announcement of a 25% tariff on Indian imports (last month)," Goldman Sachs said in a report on Thursday. 'If the new additional duty (including exclusions) is enforced, then that would constitute a potential incremental drag of around another 0.3pp (annualised)."
Exports to the US account for nearly 4% of India's GDP, the New York-headquartered investment bank said in its report, adding that even a modest slowdown in American demand could reverberate across the economy.
'We see downside risks to our growth estimates for both CY25 and CY26, but are not making any changes to our growth forecasts at the moment, given that there is a three-week window for negotiations until the new incremental tariffs come into effect," Goldman Sachs added.
A senior economist at a global consulting firm, speaking on condition of anonymity, warned that a 50% tariff could drag down India's FY26 GDP growth by as much as 0.8%.
'A 25% tariff could shave off 0.2-0.3% from GDP, but at 50%, the impact doesn't just double, it could be significantly worse, as some export-dependent sectors may not survive," the economist said. 'There will definitely be a negative impact. It's unclear how businesses will adjust, particularly in vulnerable sectors like textiles."
Growth forecasts split
The warnings come amid a broader wave of downward revisions to India's growth outlook.
Last month, the Asian Development Bank cut its FY26 GDP growth forecast for India to 6.5% from 6.7%, citing tariff risks and weaker global trade.
The International Monetary Fund, in contrast, raised its projection for India's economic growth in FY26 to 6.4% from 6.2%, pointing to resilient domestic demand and macroeconomic stability.
Moody's and S&P Global have both pegged India's growth at 6.5%, while the government's Economic Survey earlier this year projected a range of 6.3-6.8%.
Despite the headwinds, India remains the world's fastest-growing major economy.
A spokesperson for the Union finance ministry did not respond to emailed queries on whether the government is reassessing its forecasts in light of the proposed US tariffs.
The US is one of the few major economies with which India runs a sizeable trade surplus.
That surplus widened to $41.18 billion in FY25, up 16.6% from $35.33 billion the previous year. Exports to the US rose 11.6% to $86.51 billion, while imports climbed 7.4% to $45.33 billion.
By contrast, India's overall merchandise trade deficit stood at $282.83 billion in FY25, underscoring the strategic importance of its trade with the US.