For the past few weeks, emerging markets, including India, have been reeling under fears of an impending trade war triggered by US President Donald Trump. However, according to market experts, US reciprocal tariffs would have only a limited impact on the Indian economy.
According to S&P Global Ratings, the economy of India is more oriented towards domestic products and less reliant on exports. For instance, Indian motorcycles in the US attract a meagre 2.5 per cent tariff while US two-wheelers in India attract a 100 per cent tariff. This is not only limited to automobiles.
However, most imports from the US cater to a higher income range in India, unlike many Indian imports to America that service the middle class there. The sheer dynamics of the trade, along with the US-rupee forex rate render US items in India a luxury. This is also one of the reasons why reciprocal tariffs do not affect the retail landscape of India to a higher degree.
According to YeeFarn Phua, Director, Sovereigns and International Public Finance Ratings, Asia-Pacific at S&P Global, India is touted to grow its GDP by 6.7 to 6.8 per cent in the coming two years. Official government projections put GDP growth for the current fiscal at 6.4 per cent.
"India's dependence on exports for growth is not that great. So, therefore, I think the impact will be more or less limited," Phua stated, referring to US tariffs. However, the market expert warned that jewellery, pharma, textiles, and chemicals may incur higher tariffs.
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The GPD growth is already normalising to a "sustainable" level following the latest Union Budget provisions that focused on income tax cuts directly impacting households, said Phua.
"We anticipate that consumer spending and public investments will maintain real GDP growth at around 6.7 to 6.8 per cent in the next two years," Phua stated. Even though the growth rates are not as impressive as before, India is above its peers at similar income levels. This is what the S&P India director reasoned as what would support fiscal revenue growth despite income tax cuts.
S&P Global’s rating for India, however, does not align with Phua’s words. The country is rated BBB-, the lowest in the investment grade. As a consolation, the outlook on the rating was raised from stable to positive, back in May 2024.
Phua said that the country’s fiscal metrics remained positive, with steady growth in the tax revenue-to-GDP ratio and a lowering central government deficit.
S&P Global projects that the Modi government would meet its fiscal deficit targets for the current (4.8 per cent) and the upcoming fiscal (4.4 per cent), due to "continued large dividends coming from the central bank, as well as potential capex under-spending on the expenditure side".
The current administration’s track record of meeting fiscal targets also factored into their outlook, the ratings agency reasoned.
Last week, PM Narendra Modi met with Trump and discussed tariffs in detail. "I told Prime Minister Modi yesterday [sic] I said, 'Here's what we are going to do: reciprocal. Whatever you charge, I’m charging,'" Trump said. The US president went on to quote Modi's response, "No, no, I donֺ’t like that."
While major Indian exports such as textiles, steel, aluminium, and chemicals might bear the brunt of reciprocal tariffs, the impact on the economy and the larger retail space in India is expected to be minimal.
