Impact of US Tariffs on India's Economy: A Comprehensive Analysis
Overview of Export Losses Due to US Tariffs
New Delhi, Aug 1: A recent report from CareEdge Ratings indicates that the direct loss from increased US tariffs on Indian exports may only reach approximately 0.3-0.4% of India's GDP. This is attributed to the country's predominantly domestic economy and its relatively minor share of goods exports to the US, which provides a buffer against such losses.
The report highlights that India's overall reliance on exports is low, with merchandise exports to the US constituting about 2% of GDP, further enhancing its resilience.
Additionally, the services sector, which is not affected by these tariffs, is expected to continue bolstering the external economy.
The report forecasts that the current account deficit (CAD) will remain manageable at 0.9% of GDP for FY26.
Furthermore, any shift in India's oil imports away from Russia is anticipated to have a negligible effect on the CAD, as the price gap between Russian Ural and the benchmark Brent Crude has decreased significantly from an average of $20 per barrel in 2023 to around $3 per barrel.
In FY25, India's merchandise exports to the US reached $87 billion, with electronic goods making up the largest portion at 17.6%, followed by pharmaceuticals at 11.8% and gems & jewellery at 11.5%.
The US represents 37% of India's total electronic exports, with certain items from this category temporarily exempt from the 25% tariffs. Moreover, India's pharmaceutical exports to the US, which account for 35% of the total, are also excluded from these tariffs.
Despite this, there remains a significant risk of sector-specific tariff actions. India boasts one of the highest numbers of US FDA-approved manufacturing facilities for generic medicines. While uncertainties regarding tariffs linger, the sector's inherent competitive strengths provide some level of resilience.
The report notes that India's tariff advantage for exports to the US has diminished compared to several Asian competitors, including Vietnam, Indonesia, and South Korea, following the implementation of the 25% tariff and potential penalties related to India's trade relations with Russia.
Ongoing trade negotiations between India and the US are expected to continue, potentially offering some relief. However, India is likely to approach discussions regarding sensitive sectors like agriculture and dairy with caution, indicating that these negotiations may take time to finalize.
In light of these developments, it remains premature to identify clear beneficiaries or victims in the shifting tariff environment. Ongoing volatility in global financial markets is expected, and tariff-related changes will be crucial to monitor in the upcoming months.