As punitive US tariffs of up to 50% on Indian goods came into effect recently, India’s economy is facing one of its most significant trade tests in years. However, analysts and policymakers believe that the disruption will be temporary and will not derail India’s long-term growth trajectory. India’s resilience and momentum are seen as vital factors capable of withstanding this turbulence.
Economic Context
India, the world’s fourth-largest economy and one of the fastest-growing major economies, experienced a significant rebound following the pandemic-induced downturn. The economy grew by 9.2% in FY24 before moderating to 6.5% in FY25, largely due to tighter credit conditions. This economic recovery was bolstered by corporate and banking sectors successfully deleveraging and repairing balance sheets, resulting in a stronger financial system. According to S&P Global Ratings, while exporters will undoubtedly feel the impact of the tariffs, the fundamental factors driving India’s growth remain solid.
Impact of Tariffs
The recent tariffs are a reaction to geopolitical tensions, particularly the United States’ disapproval of India’s Russian oil purchases. The cumulative tariffs now stand at 50%, the highest ever imposed on Indian exports, affecting various sectors such as textiles, gems, jewellery, footwear, chemicals, sporting goods, and furniture. However, sectors like pharmaceuticals and electronics have been exempted, highlighting the selective nature of the sanctions.
Trade estimates suggest that approximately $48.2 billion worth of exports are affected, equating to about 2% of India’s GDP. After accounting for exemptions, the effective exposure lowers to about 1.2% of GDP. Notably, India is less reliant on trade than many other countries, with approximately 60% of its growth derived from domestic consumption.
Long-term Growth Prospects
Analysts, including S&P’s director YeeFarn Phua, emphasize that India’s strong consumption base and ongoing investment cycle will ensure long-term prospects remain unaffected. Research from the State Bank of India indicates a potential GDP growth dip of 40-50 basis points at worst, with higher input costs possibly contributing to inflation. Still, India’s economic buffers are noteworthy. With foreign exchange reserves around $660 billion—covering over 10 months of imports—and robust bank credit growth exceeding 14%, the country is well-positioned to endure shocks. Additionally, the vibrancy of IPO fundraising and growing digital transactions reflect a resilient domestic economy.
Adaptation and Market Reorientation
Chief Economic Advisor V Anantha Nageswaran acknowledged that sectors like textiles, gems and jewellery, and seafood would face immediate challenges but believes the adverse effects will be short-term. India’s exporters are already taking steps to adapt, exploring markets in Europe, Latin America, Africa, and Southeast Asia to offset losses from the US tariffs. The ongoing negotiations for a free trade agreement with the European Union and a potential pact with the UK aim to significantly boost bilateral trade.
Global Economic Sentiments
Global economic institutions, including the IMF, project continued growth for India, estimating a GDP growth of 6.5% in FY26, with non-oil GDP expanding above 6% annually. The Indian government’s policies aimed at doubling manufacturing output to $1 trillion by 2031, supported by production-linked incentives and infrastructure spending, are further bolstering confidence.
Despite challenges from rivals like Vietnam and China—who currently enjoy lower tariff rates—India has made significant strides in capturing market share within US supply chains, particularly in the textile sector.
Challenges Ahead
Nonetheless, some policymakers caution against complacency. Nageswaran has raised concerns over potential dependency on foreign inputs and emphasized the need for strategic independence in critical areas such as batteries, semiconductors, and AI hardware. Industry associations are advocating for reforms to enhance competitiveness in high-value sectors and reduce logistics costs.
A Political Dimension
The political narrative surrounding the tariffs is also significant. While former President Trump frames the tariffs as a punishment for perceived defiance on Russia, Prime Minister Narendra Modi reinforces a nationalistic commitment to protecting the interests of Indian workers and farmers.
Conclusion
The pathway forward for India involves capitalizing on its extensive domestic market, diversifying trade partners, and accelerating reforms to enhance competitiveness. Analysts agree that the economic fundamentals, adaptation strategies, and robust domestic consumption will allow India to absorb external shocks while maintaining its growth trajectory.
In summary, while the imposition of steep tariffs presents immediate challenges, the overall outlook for India’s economy remains positive, underscoring its resilience and potential for long-term growth. In the face of geopolitical tensions and potential market shifts, India’s strategic actions and economic robustness will be crucial in navigating this turbulent landscape.
