Over the last several months, geopolitical tensions and uncertainty around the impact of US President Donald Trump’s reciprocal tariffs announcement have cast a shadow on global growth and corporate investments. Indian companies are well-positioned to navigate this phase of uncertainty and will continue to invest as demand gradually revives, according to senior executives at Moody’s Ratings and its Indian affiliate, ICRA. However, the sectoral impact will vary.
According to the executives, most Indian companies are not directly affected by US import tariffs as their major focus is domestic consumption and dependence on exports is low.
Government initiatives to boost private consumption, expand manufacturing capacity and increase infrastructure spending will offset the weakening outlook for global demand, they say. Shifts in global supply chains should also aid Indian manufacturing.
Moody’s estimates that non-financial companies its rates will spend around $50 billion annually in capital spending over the next two years. Most companies are expected to fund the majority of their capital spending from internal accruals such that average portfolio leverage, as measured by debt/EBITDA (earnings before interest, taxes, depreciation and amortisation), will remain at or near current levels of 3.0 times pointed the ratings agency.
“By and large, they depend on domestic consumption. And that story is fairly robust. So you have got a supportive domestic funding environment. You have got favourable government policies so far as government investment is concerned. And you have got the demographic dividend. So the domestic side of things is fairly robust,” pointed Vikash Halan, MD, corporate finance, Moody’s Ratings.
But, not all sectors will be immune to the tariff impact.
Select auto parts categories, cut and polished diamonds, and seafood exports have notable exposure to the US market and may face headwinds from demand moderation or rising competition. There is an expectation that the US economy will slow down, and in this uncertainty, US companies will cut back on spending, which will also impact IT services companies.
Oil and gas companies could also be impacted, especially upstream companies, which will see earnings impact due to low crude oil prices. Indian steel companies don’t export a lot, but amid increased import tariffs by the US, Chinese companies could divert their exports to other markets, and that would put pressure on prices. Indian pharma companies are big exporters of generic drugs; some companies are even exporting speciality medicines. How their earnings and margins get impacted will be something to watch out for, pointed out K Ravichandran, chief ratings officer at ICRA.
In contrast, the textiles sector is expected to benefit from its comparative advantage over China, further supported by the recently concluded India-UK Free Trade Agreement, according to him. Geopolitical tensions, particularly the India–Pakistan conflict, may weigh on near-term demand for travel and hospitality services, but the longer-term outlook remains strong.
Over the last few quarters, a slowing urban demand has impacted growth at consumer-facing companies, and therefore, capex spending, especially by smaller companies too, has been limited.
“Urban consumption went through a slowdown in the last financial year because of high inflation. Income growth was not adequate in relation to the cost escalation, and because of that, people were deferring their spending and deferring their large ticket purchases. Because of that, companies didn’t see a need to add capacities,” he noted.
Capacity utilisation across sectors is still around 70-odd per cent, and consumption would have to really “fire” for capacity utilisation to improve, and that, in turn, creates a need for companies to add capacity, according to Ravichandran.
While rural consumption has picked up, recent measures like the income tax relief in the Union Budget and interest rate cuts by the Reserve Bank should give urban consumption a boost in the next 1-2 years.