Impact of US Tariffs on Indian Exports: Insights from SBI Research
Overview of Tariff Implications
New Delhi, Aug 1: The recent decision to impose a 25% tariff on Indian goods is deemed a "poor business choice." However, according to a report from SBI Research, the global supply chain is expected to adjust naturally, mitigating the adverse effects. Indian enterprises are encouraged to promote 'Made in India' as a symbol of superior quality.
Economic Comparisons
The report highlights that the US economy faces a higher risk of downgrades in GDP, inflation, and currency stability compared to India.
While the US remains India's largest export market, accounting for 20% of exports in FY25, India has successfully diversified its export markets, with the top ten countries representing only 53% of total exports.
Key Export Items
India's exports to the US are heavily concentrated, with the top 15 products making up 63% of total exports. Key categories include electronics, gems and jewelry, pharmaceuticals, and machinery, which collectively represent 49% of exports to the US.
Previously, tariffs on these goods ranged from 0% for items like diamonds and smartphones to a maximum of 10.8% for certain cotton products. The new 25% tariff will now apply to all these categories.
Government Initiatives and Market Dynamics
Government initiatives such as the Production-Linked Incentive (PLI) scheme have boosted exports of smartphones and photovoltaic cells to the US. Additionally, adjustments to the Goods and Services Tax (GST) on cut and polished diamonds have enhanced gems and jewelry exports.
India plays a crucial role in the global supply chain, particularly in providing affordable and essential medicines, including life-saving oncology drugs and antibiotics.
Pharmaceutical Sector Concerns
In the generic drug market, India fulfills nearly 47% of the US's pharmaceutical requirements. If the US shifts its manufacturing and active pharmaceutical ingredient (API) production elsewhere, it could take 3-5 years to establish significant capacity, potentially leading to drug shortages and price hikes for American consumers.
With the US accounting for 40% of India's pharmaceutical exports, the sustained 25% tariff could reduce earnings for pharmaceutical companies by 2-8% in FY26, as many major firms derive 40-50% of their revenue from the US market.
Competitiveness and Tariff Recommendations
The report indicates that the tariff increase may diminish competitiveness in the US pharmaceutical market, exerting pressure on profit margins due to the inability to transfer costs to consumers.
When analyzing the sectors affected by the most favored nation (MFN) tariffs imposed by India on US imports, the average MFN tariff is approximately 20%. Sectors such as automobiles, FMCG, alcoholic beverages, and textiles have tariffs exceeding 15%. The SBI report suggests that the Indian government consider reducing tariffs in these areas.