How Will US Tariffs Impact India's Economy? Insights from Economic Affairs Secretary

Government's Response to US Tariff Hike

New Delhi: The Indian government is devising a strategy to address the repercussions of a significant 50% tariff increase imposed by the United States on Indian exports, as stated by Economic Affairs Secretary Anuradha Thakur.

Thakur noted, "Certain sectors that are labor-intensive and have exposure to the US market may face challenges. The government is cognizant of this and is evaluating the potential impacts while exploring solutions."

Additionally, she mentioned that the Department of Economic Affairs has initiated measures to stimulate domestic demand, which could assist manufacturing sectors affected by the US tariffs.

In the recent Budget, the government introduced a zero income tax rate for earnings up to Rs 12 lakh under the new tax framework, offering significant savings for taxpayers. Furthermore, GST reforms aimed at rate rationalization are expected to lower prices on various goods.

Moreover, favorable monsoon conditions are anticipated to enhance agricultural output, thereby boosting rural demand.

Thakur expressed confidence that the government is on course to meet the fiscal deficit target of 4.4% set in the Budget, despite some temporary discrepancies reflected in recent monthly figures.

This assertion is particularly relevant given that the Centre's fiscal deficit reached 29.9% of the annual target by the end of July, compared to just 17.2% of the Budget Estimates during the same timeframe last year.

She added, "Concerns regarding achieving the target have arisen due to the latest figures. However, I want to emphasize that evaluating fiscal deficit numbers on a quarterly or monthly basis may not provide an accurate representation due to timing mismatches in receipts and expenditures."

Thakur reassured that the overall fiscal deficit assessment indicates that the target will be met.

The Centre projects the fiscal deficit for 2025-26 to be 4.4% of GDP, amounting to Rs 15.69 lakh crore.

She highlighted that the economy's fundamentals remain robust, with recent private consumption figures showing positive trends.

The gross capital formation data indicates strong public and private capital expenditure, which is expected to remain stable in the upcoming quarters.

Thakur remarked, "Government capital expenditure has significantly contributed to our performance thus far, positively impacting both fiscal deficit and growth figures."

Regarding the GDP growth of 7.8% in the June quarter, she noted that it reflects the broad-based nature of economic expansion.

Thakur stated, "The Q1 figures demonstrate the resilience of our economy, showcasing a strengthening momentum anchored in solid macroeconomic fundamentals."

Looking ahead, she mentioned, "We believe that the key factors supporting our performance in Q1 include strong manufacturing, construction, and service sector outputs, along with robust agricultural growth and domestic demand that have bolstered our growth figures."

India's economy recorded a surprising 7.8% growth in the April-June period, marking its fastest pace in five quarters.

This growth in the first quarter of the current fiscal year was primarily driven by a strong agricultural sector and supported by services such as trade, hospitality, finance, and real estate, according to the latest government data.

The previous peak in GDP growth was 8.4% during January-March 2024, as per the released data.

India continues to be the fastest-growing major economy, outpacing China's GDP growth of 5.2% in the same April-June timeframe.