US President Donald Trump has imposed an additional 25 per cent tariff on Indian goods as a penalty for buying Russian oil. These additional tariffs will come into force 21 days from August 6. Here we are factoring in the 25 per cent tariff that has come into force from August 7.
Let’s do a rough calculation of what may happen to the Indian stock markets in that scenario.
India’s exports to the US in FY2025 stood at $86.51 billion. In the absence of an Indo-US trade deal, at least half of these exports will be cut down in the most likely scenario.
In the worst-case scenario, this decline will be even more. This is because many of India’s competitors in exporting to the United States have been imposed with lower duties of 20 per cent or 15 per cent. So, they now have a competitive advantage over Indian exports to the United States.
Many export-oriented sectors in India are more labour-intensive
Many of the export-oriented sectors in India are relatively more labour-intensive. This means that they employ a large number of people. An example is the brass industry of India.
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India exported brass products worth an average of around $400 million annually to the US over the past three years. The brass industry in India is a relatively more labour-intensive industry. So the risk is high that the impact of higher US tariffs may cause unemployment in India on a larger scale if remedial steps are not taken.
Multiplier effect impact
Now, if you take into account the multiplier effect, the impact of this consequent unemployment on India’s GDP will be much higher than what it looks like in terms of a reduction in India’s exports to the US. The multiplier effect means a much larger impact than the direct impact of an economic event.
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For instance, if a person working in an export-oriented sector loses her job, she will start spending less on discretionary items. This, in turn, will reduce the income of shops that sell discretionary goods and the income of companies that make them. And so on and so forth.
The sum that makes the GDP
Gross Domestic Product or GDP of a country is the sum of four components. These are Government Expenditure, Private Consumption, Private Investment and Net Exports. Net exports are the difference between the exports of a country and its imports. The net export component of the GDP will be directly adversely impacted by higher US tariffs.
Companies and businesses that will see their revenues and profits go down because of the higher tariffs may cut down on private investment. Those getting laid off because of this will cut down their private consumption.
The role of government expenditure in supporting GDP growth will therefore become more important. But the revenues and tax collection of the government will also go down because the economy will slow down due to higher tariffs. So the government’s ability to spend more will also be curtailed.
Back-of-the-envelope calculation
Let’s do a rough back-of-the-envelope calculation here. Assume that India and the US are unable to reach a trade deal in the next year. We are assuming a scenario of only a 25 per cent tariff here, as aforementioned. And in the most likely scenario, they result in a reduction in India’s current exports to the US by half to $43 billion in the next one year.
India’s real GDP in 2024 was roughly $3.91 trillion or $3,910 billion. $43 billion is 1.099 per cent of $3,910 billion. So if India’s exports to the US are cut by half, the GDP of the country will shrink by at least 1.099 per cent.
This number may turn out to be a bit lower if some of the decline in exports to the US is offset by higher exports to other countries—such as to those that have done a Free Trade Agreement (FTA) with India.
If we take World Bank data of India’s GDP and total exports between 2014 and 2023, and perform a regression analysis on it, it comes out that for a 1 per cent increase in India’s GDP, total exports need to increase by 3.69 per cent.
So the multiplier effect of exports on the rest of the economy can be taken as 0.27 (1 per cent/3.69 per cent). So a one percentage point decrease in exports will cause a decline of 0.27 per cent in the rest of the three components that make up the GDP. $43 billion decline in exports will cause the rest of these components to shrink by $11 billion.
That is 0.28 per cent of total current GDP. So 1.099 per cent + 0.28 per cent = 1.37 per cent. That will be the percentage by which India’s GDP may shrink in the next one year. So its GDP will go down from $3.91 trillion currently to $3.85 trillion.
Market capitalisation-to-GDP ratio
According to BSE data, the total market capitalisation of the Indian stock markets is Rs 4,46,12,575.39 crore or $5.12 trillion, as on August 6 2025. So India’s market capitalisation-to-GDP ratio currently is 1.30.
If this ratio is maintained, then in the next year, the total market capitalisation of Indian stocks will go down from $5.12 trillion to $5.01 trillion. That will be a loss of $110 billion or Rs 9.57 lakh crore (at the prevailing exchange rate of Rs 87/dollar).
But the market capitalisation-to-GDP ratio also factors in the future growth prospects of the companies. With these high tariffs, the future growth prospects of Indian companies will also go down.
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So the actual decline in the value of Indian listed stocks may be even more! India’s total market capitalisation-to-GDP will also go down from the current 1.30 level.
Dhiraj Relli
And this is just one possible scenario. What if the 50 per cent tariff rate continues? Or on the brighter side, what if India and the US sign a trade deal soon? Let us hope for the best. And watch patiently. These are, after all, just rough, back-of-the-envelope calculations to get a rough idea of things amidst all the uncertainty that prevails.
The author, Dhiraj Relli, is the MD and CEO of HDFC Securities.
The opinions expressed in this article are those of the author and do not purport to reflect the opinions or views of THE WEEK.
