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US President Trump announced a 25% tariff on India (April’s reciprocal rate 26%) ahead of the August 1 implementation date. He also suggested that there might be a additional (unspecified) penalty because of India’s energy purchases from Russia. Negotiations between the US & India have been going on for a few months, where India’s ask, reportedly, was for a comprehensive deal with specific terms rather than a version which is either lopsided or light on details (see India and ASEAN-6 markets: Trade deals – seeking clarity on the fine print). Market access on few strategic and sensitive sectors including India’s farm, diary and auto were sticking issues, besides reluctance to implement an immediate across-the-board tariff reduction in US’ favour. Factoring in sectoral exemptions (e.g. pharma) and likelihood of follow up discussions, the effective rate might settle into the new indicative baseline range of 15-20%, levelling the field with regional competitors.
US is the largest export partner for India at 18% of total exports, amounting to ~2.3% of India’s GDP, comprising of smartphones, pharma, textiles, gems & jewellery, iron & steel, machinery, amongst others. Of these, exposure of exports in pharma, gems & jewellery, electronics and textiles to the US is relatively outsized, with a likely impact on the sectors' production and export volumes if these tariff rates stick. Pressure to diversify energy and military purchases away from Russia will also be another watch factor, considering Russia accounted for a third of the India’s oil imports last year. In terms of the economic impact, negotiations are likely to continue into August, which keeps the door open to lower the tariff rate. Ahead of the announcement, the effective rate on US imports from India stood at ~10-11%. Goods exports were frontloaded in first half of the year, with a payback likely in 2H until clarity surfaces on the exact landing rate.
We had previously estimated around 25-30bp of impact on growth if rates were uniform across sectors. Downside risks are likely to be offset by fiscal support for labour intensive industries and smaller exporting firms, besides further rate cuts (DBSf - 50bp cuts in 2H25). In the interim, authorities will seek fresh markets, with acceleration in trade agreements after the successful completion of the FTA with the UK in May (EU, New Zealand etc under discussions). Despite limited tariff arbitrage, we are still of the view that the economy will continue to benefit from trade diversion flows as manufacturers diversify and derisk from other production bases, including China.
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