How Will New US Tariffs Impact India's Economy? Experts Weigh In
Economic Implications of US Tariffs on India
Experts have indicated that the introduction of a 25% tariff on imports from the US, effective August 1, could negatively impact India's GDP. However, there is optimism that ongoing negotiations for a mutually beneficial trade agreement with the United States may alleviate some of these effects.
The sustained higher tariffs could particularly influence vital sectors such as marine products, pharmaceuticals, textiles, leather, and automobiles, where trade between the two nations has been notably strong.
Earlier today, US President Donald Trump declared a 25% tariff on all goods imported from India starting August 1, along with an unspecified penalty for purchasing military equipment and crude oil from Russia.
This unexpected announcement followed a statement from Indian officials regarding a US trade delegation's visit scheduled for August 25 to discuss a trade agreement.
In light of previous tariffs, ICRA's Chief Economist Aditi Nayar revised India's GDP growth forecast for FY26 down to 6.2%, anticipating a modest increase in exports and delays in private capital expenditure.
Nayar noted, 'The proposed tariff and penalty from the US exceed our earlier expectations, likely creating a hurdle for India's GDP growth. The impact will largely depend on the magnitude of the penalties imposed.'
Agneshwar Sen, EY India's Trade Policy Leader, emphasized the importance of the ongoing negotiations, stating that both nations are actively engaged in discussions, with the US team expected to arrive in India later this month to finalize a comprehensive trade agreement.
'Given our shared interests and history of collaboration, we believe both sides can constructively address these contentious issues and reach a mutually beneficial agreement soon,' Sen remarked.
The 25% tariff is a concerning development, especially when compared to lower rates for competitors like Vietnam, Indonesia, and the Philippines, which also produce similar labor-intensive goods and electronics, according to Elara Capital's Economist Garima Kapoor.
While the specifics regarding tariffs on exempt items such as pharmaceuticals and those subject to differential rates like iron, steel, and automobiles remain unclear, Kapoor highlighted that including pharmaceuticals in the tariffs could negatively impact India's exports, as the US accounts for over 30% of India's pharmaceutical exports.
'If a deal is not finalized by September or October, we anticipate a reduction in India's full-year GDP growth estimate by 20 basis points,' she added.
Rishi Shah, Partner and Economic Advisory Services Leader at Grant Thornton Bharat, noted that given the escalating tensions surrounding Russia-Ukraine negotiations, some adverse developments were expected.
He emphasized two key points: first, policy positions are rarely final in today's rapidly changing global landscape, and second, markets have a remarkable ability to adapt, often leading to innovation and new equilibria even in challenging conditions.
'Ultimately, maintaining growth momentum will depend on our capacity to innovate while strengthening economic partnerships globally. This situation underscores the value of our multi-alignment strategy in an increasingly multipolar world,' Shah concluded.
Nachiketa Sawrikar, a fund manager at Artha Bharat Global Multiplier Fund, stated that the Indian government likely anticipated this tariff rate, especially since peers like China face a 30% tariff.
'However, other ASEAN nations have rates between 19-20%. While this news is not favorable for India, it could have been worse,' he remarked.
Rahul Ahluwalia, Founder-Director of the Foundation for Economic Development, expressed that a 25% tariff would leave India at a disadvantage compared to competing nations like Vietnam and China, urging India to pursue a trade policy agreement with the US.
Utsav Verma, Head of Research at Choice Broking, mentioned that investors would likely reassess their strategies with a blend of caution and optimism, noting that sectors such as textiles, pharmaceuticals, and automotive components might experience reduced investor interest in the short term.
Despite this, recent advancements in trade negotiations indicate a positive trajectory, and 'we believe a trade deal will eventually materialize if both nations demonstrate the necessary political will,' he stated, adding that many investors expect the tariff rate to stabilize around 15%.
Pavan Choudary, Chairman of the Medical Technology Association of India, expressed concern over Trump's announcement on Truth Social regarding steep tariffs on India, labeling it economically shortsighted and strategically misguided.
'As a sovereign nation, India makes independent decisions in defense and energy based on national interests and long-term strategic priorities. Attempting to penalize these choices through coercive trade measures is not only inappropriate but counterproductive. Framing a key democratic partner in adversarial terms sends the wrong message and could jeopardize a relationship built on shared strategic interests and trust,' Choudary added.