India's tariff rates at higher end, likely to be more exposed to reciprocal tariffs announced by Donald Trump: Analysts

Ever since Donald Trump was reelected as the US President, global markets have been in turmoil amid escalating trade tensions and uncertainty around the impact of the new tariffs. On Thursday, Trump announced plans to impose reciprocal tariffs on trading partners.

Essentially, the US will impose the same tariff rate on imports from other countries as other countries impose on US exports.

This move threatens to upend trade and relationships the US has with other countries, including its close partners the European Union, and emerging markets like Vietnam, Thailand and India. In fact, hours before Trump met Prime Minister Narendra Modi, he had mentioned India, stating it had more tariffs than any other country.

India has, over the years, imposed tariffs on a slew of imports, in a bid to protect Indian industry as well as push more companies to make in India.

Upasana Chachra, chief India economist at Morgan Stanley, noted that the weighted average tariff rates imposed on US imports by India is at 8.5 per cent (adjusted to the various tariff reductions announced in the recent Union budget), compared with tariff rates imposed by the US at 3 per cent. Also, India has the seventh largest trade surplus with the US at around $45.7 billion.

"The US has been a significant destination for India's exports, with its share in overall exports at 15.8 per cent in FY2018, while it rose to 16.9 per cent in FY2020 and touched 17.7 per cent in FY2024. On the other hand, India comprises a rather tiny share of US overall imports, with its share at 2.1 per cent in 2017 and 2018, rising by 20 bps to 2.3 per cent in 2019, and further up to 2.7 per cent as of 2024," noted Chachra.

Electrical machinery, gems and jewelry, pharma products, textiles, iron and steel, autos and chemicals, are among major Indian exports to the US. The US is also a very big market for India's services exports. The US, for instance, accounted for 54 per cent share in India's software services exports in the previous financial year.

So, how will reciprocal tariffs impact India?

"Within the Asia region, India's tariff rates are at the higher end and likely more exposed to reciprocal tariffs if implemented," said Chachra.

Nomura economists Aurodeep Nandi and Sonal Varma also pointed out that India stood out as having much higher relative tariff rates and thus is exposed to reciprocal tariffs.

"Over 90 per cent of the exports of India, the Philippines, Thailand and China (destined for the US) have higher relative tariff rates and are therefore most at risk of higher reciprocal tariffs," they said.

India has been trying to avoid confrontation with the US, announcing import duty cuts in the recent Union budget, in sectors like electronics, textiles and high-end motorcycles.

According to Morgan Stanley's Chachra, an increase in weighted average tariff rates by approximately six percentage points will likely be manageable.

"However, we worry that certain segments may get much higher tariff considering that India levies very high tariff on segments like motorcycles (tariff rate of 30 per cent, reduced from 50 per cent earlier)," she said.

Also, one has to consider the indirect impact of the uncertainty stemming from trade policies creating an overhang on business confidence and potentially lower global growth, Chachra added.

Over the last few months, foreign institutional investors have been selling heavily in emerging market equities, including India. This tariff-related uncertainty may further lead to risk aversion, driving more money out and in turn strengthening the US dollar. That will pressure emerging market central banks, including the RBI, which recently cut the repo rate by 25 basis points and has been taking several measures to boost domestic liquidity.

Earlier this week, Trump announced 25 per cent tariffs on all steel and aluminium imports.

Ashutosh Somani of JM Financial Institutional Securities noted the impact of the US tariffs on Indian steel companies was likely to be minimal.

"Steel tariffs is unlikely to impact industry prices/ demand in a meaningful way given US is a relatively small market. Steel imports accounted for 23 per cent of American steel consumption in 2023 with Canada, Brazil and Mexico being the largest suppliers," said Somani.

US imports of steel from India accounted for just $1.9 billion, compared to $11.2 billion from Canada, $6.5 billion from Mexico and $5.2 billion from Brazil and China, according to JM Financial's analysis. Similarly, US import of aluminium from India was low at $271 million.