MUMBAI: Stating that the 25% tariff on Indian exports to the US from August 7 leaves the country at a relative disadvantage, a rating agency has warned that unless a bilateral trade agreement is swiftly concluded, the current tariff structure can significantly alter the export trajectory this fiscal and beyond. High sectoral dependence on US markets, coupled with tariff asymmetry, poses a serious challenge to India's trade competitiveness, it added.
In a jolt to the bilateral trade dynamics, US president Donald Trump has imposed a 25% reciprocal tariff on Indian goods effective August 7. This tariff, accompanied by an additional unspecified penalty on India's crude and defence imports from Russia, is significantly higher than tariffs on other Asian peers like Vietnam (20%), Indonesia (19%), and Japan (15%), placing it at a relative disadvantage.
In a sector-wise analysis of the impact of these tariff tantrums, domestic rating agency Icra said this will have a 20 bps impact on the FY26 growth -- down from 6.2% to 6%.
Despite a robust trade surplus with the US, which rose to $41 billion in FY25 from $21 billion in FY15, India's competitive edge could be eroded in the absence of a bilateral trade resolution, it warned.
The worst-hit sectors include textiles, auto components, tyres, chemicals, agrochemicals, and cut & polished diamonds. For instance, the US accounts for 27% of India's auto component exports, and around 36% of cut & polished diamonds exports are directly routed to the US. Cut & polished diamonds also face indirect risks due to potential trans-shipment tariff enforcement on intermediaries like Dubai or Israel.
Tyre exports to the US (17% of total) and agrochemical exports (18%) are similarly exposed, as domestic firms now face tariff disadvantages relative to key regional competitors.
On the other hand, sectors like pharmaceuticals, petroleum products, and telecom instruments remain relatively stable. The pharma sector, with 37% of its exports directed to the US, has so far been exempted from the new tariffs.
The telecom instruments sector, where the US forms over 40% of India's exports, faces negligible impact as competing nations have only slightly lower tariffs. Petroleum product exports are also excluded from the tariff hikes, though India's reliance on discounted Russian crude, which has shrunk in FY25, may have indirect cost implications.
The risk of US trade being redirected to countries like Vietnam and Indonesia is high, given their lower tariff burden.
In light of this, the agency has noted early signs of export re-routing. Cut & polished diamond exporters, for example, may shift to trade hubs like Belgium and the UAE. Simultaneously, firms in sectors like auto and tyres are attempting to diversify into the EU, England and Asia-Pacific, though this will take time.
