Duty Bound: India’s Growth Test Amid US Tariff Heat
The new 26% US tariff on Indian imports poses near-term challenges for India’s export sectors and small businesses, potentially shaving up to 0.5% off GDP growth. But it also opens doors for India to capture global market share as rivals like China and Vietnam face even steeper duties. With sectors like pharmaceuticals and electronics relatively insulated and domestic demand remaining strong, India has an opportunity to turn this disruption into long-term gains—if it can act quickly on trade diversification, policy support, and manufacturing upgrades
The imposition of a 26% reciprocal tariff on Indian goods by the US, announced by President Donald Trump under a sweeping new trade policy, marks a critical juncture in India’s economic trajectory. While this move is part of a broader effort by the US to reset global trade dynamics, its impact on India is multifaceted—bringing both headwinds and potential long-term advantages.
At the heart of the disruption is India’s export engine. The US accounts for 18% of India’s total exports and nearly 2.2% of its GDP. Sectors such as gems and jewellery, auto components, electronics, and steel are particularly vulnerable to cost hikes and demand contraction in the American market. Gems and jewellery alone—worth over US$ 9bn in exports—are expected to see a sharp decline in volumes as American buyers adjust to higher retail prices. According to estimates, India’s exports to the US could drop by US$ 30–33bn, shaving off 30-50bps from GDP.
Beyond trade numbers, weaker corporate confidence and postponed investment decisions may further delay India’s capex cycle. The Reserve Bank of India is expected to respond with a more accommodative monetary stance, possibly cutting rates by 25–50 bps to buffer domestic demand. However, the impact on India may be smaller than expected, especially as these tariffs also imposed on India's competitors could improve its relative position. Worth noting is that sectors like energy, semiconductors, and pharmaceuticals have been exempted, further limiting the downside.
The MSME sector—India’s economic backbone—faces the most immediate threat. Many small exporters lack the capital or flexibility to absorb sudden cost shocks. For instance, Tirupur’s knitwear cluster, heavily reliant on US-bound exports, may struggle to maintain competitiveness amid higher raw material and compliance costs. Without support from schemes like the production linked incentive or simplified access to trade finance, thousands of small businesses risk losing out to competitors like Bangladesh and Vietnam. Metals, particularly steel and aluminium—worth US$ 3.2bn in US-bound exports—are also in the crosshairs. Indian steelmakers such as JSW Steel, with 15% of their US shipments affected, will likely pivot to Southeast Asian markets. However, Vietnam and Indonesia already dominate 22% of the US import market, intensifying competition. Domestically, India’s infrastructure push may cushion some of the blow, but MSMEs in this sector remain vulnerable to price volatility and liquidity constraints. Electronics offer a mixed picture. India’s exports to the US surged to US$ 8.9bn in FY24, powered by smartphone and IT hardware growth. With global firms like Apple scaling up India operations in response to US-China decoupling, this could catalyse investment in India’s tech manufacturing ecosystem. Yet, tariffs on components like PCBs and the absence of a mature semiconductor supply chain could slow progress. India still imports three times as much electronics as it exports. We anticipate India to use this moment to accelerate FTAs with the EU and UK, diversify export markets, and deepen supply chain ties in less tariff-sensitive regions. Notably, India’s exports to FTA partners grew 13% yr/yr in 2023, compared to just 2% to non-FTA countries.
Despite short-term disruptions, India’s economy is underpinned by resilient domestic demand. GDP growth is still expected to remain in the 6.3 - 6.5% range over the next few years, provided macroeconomic stability is maintained and policy support remains strong. However, the outlook is not without risks. Currency volatility could increase as export revenues decline, pushing the rupee beyond INR 87/USD. Inflationary spillovers from higher input costs are also likely—especially in infrastructure and manufacturing. On the upside, tariffs may also help narrow India’s US$ 28bn trade deficit with the US, as higher import costs dampen inbound goods from America. In sectors like high-tech manufacturing, textiles, and pharmaceuticals, India could even gain market share as global players seek alternatives to China, Vietnam, and Bangladesh—each facing steeper US tariff rates.