MUMBAI: The pass-through effects of the ongoing trade duty hikes and a weaker dollar will lead to higher inflation in the US which in turn will impact the world’s largest economy, shaving 40-50 bps off its already weak, which has already more than halved to 1.2 per cent in the first half of 2025 from 2.5 per cent a year ago, growth this fiscal, says a report.
The higher reciprocal tariffs that American President Donald Trump considers as the main tool to become part of history have seen export duties hitting a high of 50 per cent on India from almost nil in August 6. The worst hit nations are India and Brazil, with an average 50 per cent tariffs, half of which on Indian goods come into force from today as a punitive duty for buying Russian crude oil.
"The US has already begun to show signs of renewed inflationary pressure, driven by the pass-through effects of the recent tariffs and a weaker dollar—particularly in import-sensitive sectors such as electronics, autos, and consumer durables. US inflation is expected to stay above the 2% target through 2026, driven by supply-side effects of tariffs and exchange rate movements due to higher input costs," Soumya Kanti Ghosh, the croup chief economic adviser to SBI, said in a note Tuesday.
July inflation in the US printed in at 2.7 per cent, 202 bps more than the level in June. Ghosh further said higher tariffs will affect American growth to the tune of 40-50 bps this fiscal.
The first five months of the Trump regime (began on January 20, 2025) have seen GDP growth more than halve to an anaemic 1.2 per cent during the January-June period, as against 2.5 per cent printed in the same period previous year.
The report also said the tariff war will affect $45 billion worth of Indian goods, and the worst hit sectors are textiles and gems & jewelry, both labour-intensive industries. However, pharmaceuticals, smartphones and steel are relatively insulated due to exemptions, existing tariff structures and strong domestic consumption
But this means that if a deal is not reached with Washington, the worst outcome will be a trade deficit this year with the US as against the $41-billion surplus last year.
"Our trade surplus with the US was $41 billion in FY25. As $45 billion of exports is impacted now due to 50 per cent tariffs, the worst scenario will see that our trade surplus with the US will convert to trade deficit,” Ghosh said.
The US remains our largest export destination for textiles. Over the past five years, our exporters have steadily gained market share in textiles while China’s share has fallen significantly.
The textiles and apparel industry contributes 2.3 per cent to our GDP, 13 per cent of our industrial production, and 12 per cent of our total exports. It is also the second largest employment generator, after agriculture, with over 45 million directly employed, most of them women and nearly 80 per cent of its capacity is spread across MSME clusters. The industry produces about 22,000 million pieces of garments annually, and the market size is projected to double to $350 billion by 2030 from $174 billion last fiscal.
The US also remains the largest market for our gems and jewellery sector, accounting for nearly a third of the $28.5-billion annual shipments. With US tariffs rising to 50 per cent, exporters are bracing for significant disruption.
This sector with $10 billion worth of shipments to the US which remains the largest market, accounting for nearly a third of the $28.5 billion annual shipments.
Shrimp exporters, who send more than half their output to the US, fear steep losses and order cancellations as the higher tariff comes into effect. This also impacts the prices for US consumers and making our shipments less competitive against rivals like Ecuador.
However, according to Ghosh, pharma exports, which is not exempt from higher tariffs, is safe. As much as 40 per cent of our pharma exports goes to the US, which was 5.9 per cent of the total US pharma imports in 2025, though this is 10 bps down from 2024 when the share was 6 per cent. In FY25, domestic pharma companies shipped $21.2 billion worth of drugs to the US.