MUMBAI: The higher-than-anticipated 25% tariff on Indian exports to the US is a 20-30 bps downside risk to the growth forecast this fiscal unless the ongoing trade talks bring it down, say economists.
On Wednesday night, US President Donald Trump unexpectedly announced a 25% flat tariff on Indian goods from August 1, with an unspecified “additional penalty” for India’s energy and military purchases from Russia.
While economists at the British brokerage Barclays put the tariff impact on growth at 30 bps this fiscal, the RBI has pegged it at 6.5%, while foreign agencies like the IMF and the Asian Development Bank have pegged it marginally lower at 6.4% and 6.5% respectively.
“Taking into account the sectoral exemptions, we estimate the effective tariff rate at 20% and this will be a 20 bps downside risk to the growth forecast for this fiscal,” Japanese brokerage Nomura Securities economists Sonal Varma and Aurodeep Nandi said Thursday.
The 25% tariff, plus a penalty on Russian imports, could dent growth by 30 bps this fiscal, but the higher duty is unlikely to significantly affect the domestic demand-driven economy, said Barclays.
If the 25% tariff is implemented, the effective average US tariff on Indian goods will rise to 20.6% in trade-weighted terms, Barclays said, adding this is sharply higher than both the pre ‘liberation day' tariff rate of 2.7% and the 90-day pause tariff rate of 11.6%. In contrast, India's import tariff on US goods is lower, at 11.6% in trade-weighted terms.
"We do not see the tariff threat impacting GDP growth meaningfully, at worst the impact is 30 bps. We expect final tariffs to settle in lower than 25%, as trade talks are on," the British brokerage said further.
The announced reciprocal tariff rate of 25% may be temporary and settle lower as negotiations will continue after August 1. However, the best-case outcome will still be a tariff in the 15-20% range, which is disappointing, considering India’s more advanced stage of negotiations, Nomura said, adding, “We maintain our FY26 GDP growth forecast at 6.2% but flag a downside risk of 20 bps. Exports to the US account for just 2.2% of the GDP, and include pharma, smartphones, gems & jewellery, industrial machinery, auto components, textiles and iron & steel; most of which will likely face margin pressure.”
With Vietnam facing a 20% tariff, India’s tariff of 25%, or even 15% in the best case scenario, may not lead to major trade diversion opportunities in the near-term. But over the medium-term, India is expected to remain a beneficiary of the China plus one strategy as diversification is a bigger driver of this trend, Nomura said.
Echoing similar views, Moody's Analytics associate economist Aditi Raman said while the US is India's largest trade partner with 18% of total exports shipped into that market or 2.2% of the GDP, the economy is relatively more domestically oriented than most of the region and relies far less on trade.
"Pharmaceuticals, gems, and textiles are key sectors that are likely to be hit. A point of contention is market access to the key agricultural and dairy sector, which India has historically been reluctant to grant," Raman said.
In 2024, Indian exports to the US amounted to $80.8 billion, representing about 18% of total exports. Pharmaceuticals, gems and textiles are key sectors that stand to suffer should a 25% tariff get locked in. That said, the Indian economy is more domestically oriented than most in the region and relies far less on trade.
Top exports to the US, including electrical machinery ($12 billion, including smartphones), and gems & jewellery ($9 billion), now face tariff increases of just over 24 percentage points, compared with levels before April 2.
Nomura also sees the higher tariff increasing the likelihood of monetary policy easing (the RBI-led MPC begins its three-day customary meeting for the August policy review Monday and will announce the decision next Wednesday).
“The RBI has not formally revealed its baseline tariff assumptions, but we believe 25% would likely be a negative surprise. With inflation likely to remain below the 4% target (June printed in at a 77-month low of 2.1% on top of the 2.8% in May), despite any currency weakness, we continue to expect 25 bps cuts each in October and December to a terminal rate of 5% by end-2025, with risks skewed towards further cuts. We believe the probability of a cut in August has risen to 35% (from 10%) pre-tariffs,” it said.
India will also lose out on any potential trade diversion benefits in the near-term. "While we do not know the quantum of penalty that the US intends to impose on India over and above the 25% tariff, a 5-10% tariff differential with other Asian competitors may not move the needle much. The reciprocal tariffs matter to gain a relative tariff arbitrage over competitor countries," it added.
India’s oil imports from Russia currently account for 35% of its total crude imports.
Deutsche Bank economists said the 25% tariff is likely to be brought down to 15% eventually. "With India being a domestic demand-oriented economy predominantly, we do not expect the tariff shock to be material, particularly if Delhi manages to secure a bilateral-trade deal with the US. The current phase may only be a temporary setback,” they said.
Stating that exporters have some buffer due to front-loading, the German brokerage said top exports to the US include electrical machinery parts, precious stones, pharma, textiles, and chemicals.
India runs a trade surplus with the US that increased from $11 billion in FY13 to $43 billion or 1.1% of GDP in FY25. Between April and June 2025, India's trade surplus has touched $12.7 billion, up 35.4% due to the front-loading of exports (22.3%) relative to imports from the US which grew at 11.7%.
“India's sensitivity to global growth is about 0.50 now, which implies that for every 1% reduction/increase in global growth, India's growth can deteriorate/improve by an incremental 50 bps," they added.
Meanwhile, Elara Securities also expects a 30 bps drag on growth in case there is no deal with the US.
It also said the weakening rupee will be the first line of defence and thus the probability of a 50 bps rate cut in August has risen. But as of now the tariff is negative on the rupee and it may hit 88.5-89.
“With risks to growth elevated and inflation risks remaining benign, we expect the growth-supportive stance of the RBI to stay. The July inflation will likely see a print closer to 2%, bringing it closer to lower tolerance band of the RBI. As risks to growth compound after the higher tariffs, the likelihood of more than a 25 bps cut in August has increased,” they said.
