Reciprocal Risks: The Stakes of U.S. Tariffs for India's Export Sectors

As U.S. President Donald Trump proposes reciprocal tariffs targeting nations with higher duties on American goods, India finds itself squarely in the crosshairs. This policy pivot arrives just as Indian Prime Minister Narendra Modi seeks to deepen bilateral economic ties, underscoring a critical juncture for Indo-U.S. trade relations. Trump's announcement, devoid of specific implementation details but clear in intent, aims to equalize the tariff imbalance by imposing equivalent charges on imports from countries like India, which he labels as difficult for business due to its high tariff walls. This approach, framed as "charging them what they charge us," directly challenges India's average 9.5% tariff on U.S. goods, starkly higher than the U.S. rate of about 3%. Further, India's trade surplus with the U.S. has surged, doubling in the last decade to reach US$35bn in FY24. 

The prospect of heightened U.S. tariffs has already triggered a downturn in the Indian stock market, particularly affecting sectors with significant export ties to the U.S., such as pharmaceuticals, chemicals, and textiles. This market reaction underscores the fragility of India's export-driven growth model in the face of shifting U.S. trade policies.

Meanwhile, in anticipation of more stringent U.S. trade measures, India has offered selective tariff reductions, like the notable cut on bourbon whisky from 150% to 50%. However, these concessions have sparked concerns among domestic producers about the influx of cheaper American imports undermining local industries. Despite Modi's cordial discussions at the White House last week, the divergent trade outlooks of India and the U.S. pose ongoing challenges. India's attempts at preemptive concessions (as part of FY26 budget) and discussions for a limited trade package covering sectors like automobiles and agriculture reflect a strategic approach to soften potential U.S. actions. The repercussions for Indian exporters will differ across industries. For instance, U.S. tariffs on semiconductors are likely to have a minimal impact on India, whereas more price-sensitive sectors such as apparel may experience a shift as buyers potentially opt for alternatives from other nations.

Key Indian sectors stand to bear the brunt of these policy shifts:

• Pharmaceuticals and Chemicals: These industries face the risk of losing competitive advantage in the U.S. market, potentially escalating costs and reducing market share.
• Automotive and Textiles: Increased production costs and restricted market access could significantly disrupt these labor-intensive industries.

This latest development in trade policy arrives at a particularly challenging time for India, already contending with a decelerating economy and diminished demand. The Indian economy is navigating a period marked by targeted fiscal strategies and subdued consumer spending, aimed at revitalizing growth against a landscape of mounting economic pressures. At a joint news conference, Trump announced India's intent to purchase F-35 jets and energy resources from the US, along with initiating talks to address the US trade deficit with India. These discussions and acquisitions, at a time when India is experiencing economic sluggishness, could potentially exacerbate its economic strains. 

With an anticipated growth rate of 6.4% for the fiscal year ending in March—its lowest in four years—the Modi administration has provided income tax reductions for the middle class in its latest budget. Shortly thereafter, the nation's central bank reduced its main interest rate to 6.25%, a decrease of 0.25%, marking its first cut in almost five years. Central Bank Governor Sanjay Malhotra noted that a less restrictive monetary policy was now more suitable, given the prevailing economic conditions concerning growth and inflation. Consequently, this could be of concern for the overall economy, but we currently do not forsee a major broad-based impact, instead specific sectors will likely face challenges.