Recent discussions about US tariffs have sparked concerns over their possible effects on India’s economy. According to a Goldman Sachs analysis, President Donald Trump’s "Fair and Reciprocal Plan" could significantly impact India's export-driven sectors, especially those reliant on the US market. With trade relations growing in recent years, India now faces the challenge of navigating these potential tariff hikes while maintaining its economic growth trajectory.

An Overview of the Proposed Tariffs

President Donald Trump has instructed his administration to develop a "Fair and Reciprocal Plan" aimed at aligning tariffs and non-tariff barriers with those of other countries. In a press conference, he specifically called out India, along with the European Union and China, as nations with high tariffs. The suggested tariffs, if applied at the country level that would raise effectively were US tariff rates on Indian imports by 6.5 percentage points. This increase would have a significant impact, particularly on sectors that rely heavily on exports to the US.

Goldman Sachs describes three ways these tariffs could be applied through the country-level reciprocity, product-level reciprocity, and reciprocity including non-tariff barriers. Each approach presents its own challenges and potential consequences for trade dynamics. The analysis suggests that India is highly exposed to US demand, with exports to the US accounting for roughly 4.0% of its GDP, indicating that any changes to US tariffs could significantly affect India’s economic growth.

YeeFarn Phua, Director, Sovereigns and International Public Finance Ratings, Asia-Pacific S&P Global also said India will clock a 6.7-6.8 per cent GDP growth over the next two years. "The government remains very much focused on investment-led growth and also on agriculture sector reforms. However, we do think that economic expansion in India is startling to normalise towards a more sustainable level after real growth had averaged 8.3 per cent over the last three years post-pandemic. Right now, 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. These growth rates, even though slower than before, continue to place India above sovereign peers at similar income levels, and we do believe that this will continue to support fiscal revenue growth despite the income tax cuts".

The Dynamics of India-US Trade

Trade relations between India and the US have prospered quite significantly over the last decade. For instance, the two-way trade surplus in goods between the two countries has doubled from $17 billion in FY14 to $35 billion in FY24. This has boosted much from electronic exports fueled by the Production-Linked Incentive (PLI) scheme launched in 2020. Nevertheless, India's tariff structure is still higher than that of the US on many counts, especially in the case of agriculture products, textiles, and pharmaceuticals.

In other words, this pattern of trade would suggest that while India is a strong player in the US export market, the proposed tariffs may throw the balance off-center. The current tariff structure would be in favor of the US, potentially increasing costs for Indian exporters. Accordingly, Indian businesses may not be able to sustain their competitive position in the US market. The possibility of a trade war hangs in the air, thus making both countries walk a tightrope in their tariff negotiations.

Possible Economic Impact on India

The Goldman Sachs analysis reveals that India’s exports to the US account for approximately 2.0% of its GDP, one of the lowest exposure levels among emerging market economies. However, the most important consideration in assessing the economic effect is how Indian exports respond to changing US tariffs. Collection data suggests that very high increases in US tariffs may cut India-controlled GDP growth by 0.1 to 0.3 percentage points.

For example, if the US raises average effective tariff rates on Indian imports by 11.5 percentage points, the resulting GDP impact could be around 0.12 percentage points. This estimate is based on the price elasticity of demand for Indian goods in the US market. These findings highlight the importance of understanding how tariff adjustments can influence trade volumes and, in turn, economic growth.

Charting the Course for Future Trade Relations

As India assesses the potential impact of US tariffs, it must carefully consider its role in the global trade landscape. In the OECD Trade in Value-Added Database, it can be seen that India's domestic value added content in gross exports to the US represents about 4.0% of GDP in India were Middle Ground among Asian Peer Nations regarding exposure to US demand. Strategic negotiations by India will be vital to mitigate the adverse effects of the proposed tariffs

Looking ahead, India will need to engage in strategic negotiations to minimize the negative effects of the proposed tariffs. This includes exploring opportunities to strengthen trade relations, diversify export markets, and invest in sectors less susceptible to tariff fluctuations. By adopting a proactive strategy, India can better position itself to navigate the challenges of evolving trade dynamics and ensure long-term economic growth despite potential tariff increases.