Following the imposition of 50% (25% reciprocal + 25% secondary) tariffs on Indian exports to the US that came into effect on August 27th, Barclays analysts place the US tariff rate on India in trade-weighted terms at 35.7%, whereas tariffs by India on imports from the US stand at 9.4%. The bank reckons electrical machinery and gems and jewellery face the largest increases.
The US is India’s largest trading partner, accounting for 18% of India’s total merchandise exports in 2024. Barclays estimates 70% of exports to the US are at risk of the elevated tariff with clothing firms in particular danger of losing competitiveness to regional competitors such as Bangladesh and Sri Lanka whose reciprocal tariffs are much lower.
According to Amit Baraskar, Vice President & Head of Treasury at Thomas Cook India, the tariffs that came into effect last week are a harsh penalty levied in an ad hoc fashion.
“Some companies affected by this move will have no option but to shut up shop,” he says. “Trump aspired to a US+1 strategy for the globe and is now forcing the world to follow.”
Baraskar acknowledges that building new markets takes time but reckons the long term impact of US trade tariffs will be to accelerate the country’s decline as the world’s largest economy behind first China and then India.
Many of the sectors facing higher tariffs are labour intensive and operated by small enterprises, which have limited capacity to de-risk or reroute their business to other countries observes Adoniro Cestari, Head of Trade & Working Capital Solutions at Citi.
“In the near term, India’s economy is relatively less trade-dependent, so the direct growth impact is expected to be moderate,” he says. “However, over the longer term the US tariffs could negatively affect India’s integration into global supply chain diversification strategies and its goal of increasing manufacturing GDP contribution to 25%. While we do not see an immediate impact on internal risk settings for India, an upward sovereign rating momentum could be delayed.”
The Indian administration is expected to roll out measures to support the economy at large and exporters in particular explains Aastha Gudwani, India Chief Economist, Barclays.
“The Indian Prime Minister’s announcement of goods and services tax rate cuts was the first in line to support consumption, particularly directed at reviving urban demand, which has been lagging,” she says. “Specifically for exporters and micro, small and medium enterprises, the government is reportedly eyeing the emergency credit line guarantee scheme – first introduced during the pandemic – which provides collateral-free working capital with a government guarantee.”
Goods and services tax rate cuts and other proposed tax changes could act as a stimulus for the market agrees Cestari. “The cuts will help exporters remain competitive as they will lower cost on inputs, increase domestic consumption and simplify operational processes,” he adds.
However, the outlook is complicated by the appeals court decision to uphold a US Court of International Trade ruling that the tariffs are illegal, which permits the tariffs to stay in place until October 14th to give time for an appeal to the Supreme Court.
“The administration’s defeat at the appellate level again raises the prospect of potentially having to repay billions of dollars of duties collected so far,” says Brad Setser, Senior Fellow on global trade at the Council of Foreign Relations. “There is a broader issue here – namely that until there is clarity about which tariffs will stick, most firms will be reluctant to make the large, multi-year investments needed to reconfigure supply chains.”
