Gurugram (Business Correspondent): India Ratings and Research (Ind-Ra) estimates suggest that should reciprocal tariffs be imposed by the US as reported, India’s exports to the US may decline anywhere between USD2 billion to USD7 billion in FY26. “However, the weighted average tariff differential is around 7 percentage point (pp), and a more plausible scenario as per Ind-Ra is a decline in exports to the US by USD2 billion-3.5 billion, leading to a decline in the GDP growth in the range of 5-10bp from our current estimate of 6.6%,” says Devendra Kumar Pant, Chief Economist and Head Public Finance, Ind-Ra. Clarity will likely emerge in the next four to six weeks, following the discussions between the two governments. Therefore, the emerging geoeconomic situation is a key monitorable for the Indian economy.
The agency has accessed exposure of industrial sectors based on their relative tariff differentials and size of exports to the US from India. As per the agency’s assessment, textiles, chemicals (including pharmaceuticals), export-oriented jewelry & gems, auto components and electronics are more exposed to the tariff imposition. Despite large tariff differentials, food products (including vegetable, meat, fish etc) and footwear would be relatively less exposed, given the small size of the trade with the US. Similarly, petroleum fuels, if exposed to reciprocal tariffs, may find alternative markets, thereby reducing its overall exposure. The exact product-wise impact will become clear once trade negotiations between both the countries take a final shape.
Impact of Reciprocal Tariffs on Exports and GDP: The impact of reciprocal tariff on the Indian economy depends on a number of factors such as i) extent of reciprocal tariff, ii) products on which reciprocal tariffs are levied, iii) the tariffs levied on the competing countries and iv) ability of Indian exporters to find an alternative destination. We have tried to analyse the first-round impact of reciprocal tariff by the US on Indian exports and GDP growth for FY26.
The impact is susceptible to the data period and assumption on tariff hike. We have prepared 12 scenarios corresponding to four elasticities and three levels of tariff hike. Ind-Ra’s analysis suggests that the export (to the US) elasticity for the period FY07-FY24 with respect to the weighted average tariffs imposed by the US for FY07-FY24 stands at negative 0.33. This means that a 1% increase in tariffs by the US shaves off roughly 33bp of India’s exports to the US. We have used four elasticities for assessment – negative 0.33, negative 0.41, negative 0.50 and negative 0.63. The tariff differential in 2023 was 7.07pp, hence we have used three different options of tariff hikes as – 7pp, 10pp and 15pp.
Basis this, Ind-Ra’s estimates suggest that India’s exports to the US might decline by USD1.78 billion to USD7.33 billion in FY26, while the GDP growth in the fiscal may decline between 5-20bp from its earlier estimate of 6.6%. The weighted average tariff is unlikely to increase by 7pp in FY26; the most plausible scenario as per Ind-Ra is a decline in exports to the US by USD2 billion-3.5 billion, leading to a decline in the GDP growth in the range of 5-10bp.
However, bilateral trade negotiations, defense and energy pacts between India and the US could minimise the adverse impact of reciprocal tariff India. More clarity would emerge once the new tariffs for all countries are decided.
Indo-US Bilateral Merchandise Trade: The US is India’s biggest merchandise trade partner and its proportion in the total Indian exports in FY24 was 17.73% (FY23: 17.43%). The proportion of Indian exports to the US in US imports in FY24 was 2.73% only (FY23: 2.63%). However, the proportion of US exports to India in India’s imports was higher at 6.22% in FY24 (FY23: 7.10%).
Since FY09, India is maintaining a merchandise trade surplus with the US. The trade surplus increased to USD35.32 billion in FY24 (8MFY25: USD23.26 billion, FY20: USD17.27 billion). Last time India had a trade deficit with the US was in FY08 (USD0.96 billion). India’s merchandised trade surplus with the US in FY24 was 2.10x of FY19. The trade surplus during FY21-FY24 was USD29.65 billion as against USD18.82 billion during FY17-FY20.
| Figure 1 | |
Lower Tariff on Indian Goods: Since 2000, the weighted average tariff imposed by both countries on goods imported from each other has declined. The weighted average tariff imposed by India was more than 20% in 2000, which since 2008 has declined to below 10%. On the other hand, the tariff imposed by the US on Indian goods peaked at 3.9% in 2001 and declined to 2.6% in 2023. The tariff differential had declined to 3.9pp in 2008 from a peak of 22.9pp in 2000, however increased gradually to a 16-year high of 7.1pp in 2023.
| Figure 2 | |
In 2023, 86.3% (2022: 91.2%) of India’s imports from the US attracted a duty between 5%-15%. On the other hand, 87.4% of India’s exports to the US attracted a tariff of below 5%, underscoring the high tariff perception and the need for rationalisation by the new US administration.
Vulnerability of 10 Sectors: India’s exports to the US are highly concentrated. Proportion of the top 10 commodities in India’s exports to the US in 8MFY25 was 68.41% (FY23: 67.58%, FY24: 69.61%). The vulnerability of Indian economy on these 10 sectors is high in case of a reciprocal tariff imposed by US on these products, such as vehicle parts (tariff differential of 24.21% in 2023), articles of iron and steel (16.54%), ‘pearls, precious or semiprecious stones etc’ (10.10%), pharmaceutical products (9.96%), electrical machinery and equipment (9.16%), articles of apparel and clothing accessories (8.96%), mineral fuels (7.75%), organic chemicals (6.05%) and boilers, machinery and mechanical appliances etc. (6.01%) and low on ‘other made up textile articles’ (1.37%).
| Figure 3 | |
India has already reduced the custom duty on Bourbon whiskey to 50% from 150% earlier. India’s import of beverage, spirits and vinegar in FY24 was USD291.03 million (8MFY25: USD259.43 million), with a minuscule share of Bourbon whiskey. The US has already imposed a 25% duty on certain steel products and 10% on aluminum products from India. Articles of iron and steel being the seventh-largest Indian exports to the US will have some impact on Indian steel producing firms.
Destination Vulnerability: Another way of looking at vulnerability is the proportion of product-wise exports to the US in the total product-wise exports of India. The top 10 products with high concentration to the US as destination (based on the proportion of exports to the US in the total individual product export by India) form 49.07% of the Indian exports (FY23: 44.20%, FY24: 47.44%). Two products – ‘preparations of meat, of fish or of crustaceans, molluscs or other aquatic invertebrates’ and ‘fur skins and artificial fur, manufactures thereof’ are highly vulnerable to a reciprocal tariff by the US. However, the contribution of these two products in the total exports in 8MFY25 was 0.98% in 8MFY25 (FY23: 1.03%, FY24: 0.95%). The product vulnerability because of the US as a destination concentration is high for pharmaceuticals (contributing 29.23% in 8MFY25, FY23: 25.29%, FY24: 28.52% to the total exports) and ‘other made-up textile articles, sets, worn clothing and worn textile articles, rags’ (7.58%, 7.20%, 7.21%); for the rest eight products, the destination vulnerability is low. The individual firms exporting these products may have to find an alternative destination for their products where the macro vulnerability is low.
