A global trade war is upon us. US President Donald Trump spared no country while announcing a 10 percent universal tariff on all imports and additional “half-reciprocal tariffs” on countries he accused of “cheating” America. The latter group of 57 nations included India, whose exports to the world’s largest market will attract a blanket 27 percent levy.
Unlike China, Japan and Australia, which called out Trump’s bullying, the Indian government maintained calm, stating it was ‘carefully examining’ the impact
To assuage Trump’s concerns, India has slashed peak import tariffs from 150 percent to 70 percent, while the average tariff recently dropped to sub-11 percent from 13 percent. But that did not deter Trump. Luckily, two sectors that are key for India—pharmaceuticals and energy—were spared. But other equally important ones like auto, gems and jewellery, apparels and electricals could not escape the tariff sword, which also slashed an estimated $4 trillion off US stock markets in a day.
Given that the US accounts for 18 percent of India’s total exports, rating agencies see direct and indirect headwinds to growth, possibly erasing 30-60 basis points off real GDP growth in 2025-26, which is estimated at 6.5 percent now.
Others like SBI Research believe the impact on exports would be modest at 3-3.5 percent, with no bearing on growth. Helpfully, the direct impact will likely be less severe as goods exports, excluding pharma and energy, account for barely 1.7 percent of the GDP.
It’s the indirect effects that could harm more. The anticipated slowdown in the US along with weak global trade momentum would dent external demand, which in turn could weaken corporate confidence, eventually deferring the private capital expenditure cycle that’s struggling to find its feet.
The tariffs are part of a broader protectionist policy. As with others, wants reduce the trade deficit with India, which stood at $35.31 billion in 2023-24. A closer look reveals the trade landscape is dramatically changing and India must enhance its export potential in sectors like iron and steel.
The impending trade deal with the US is a crucial starting point that could help reduce the risks. Meanwhile, global markets are bracing for a 5-5.5 percent spike in inflation. If that happens, the Indian economy would not be immune to its fallouts. It may force the government’s hand to increase spending to boost demand—yet again.