The United States' decision to double tariffs on Indian goods, increasing the total duty to 50% (effective August 27), has posed a new challenge to the Indian economy. According to a Morgan Stanley report, the move could reduce India's GDP growth by up to 80 basis points over the next 12 months, unless offset by government action, policies, or reforms.

The tariffs, which take effect 21 days after the announcement, are intended to penalise India for continuing to import oil from Russia. They now apply to nearly 67% of India's exports to the United States, totaling more than $58 billion, or approximately 1.5% of India's GDP.

While goods in transit and cleared by US customs before September 17 will be exempt, the impact will begin shortly after.

What is at stake for India?

Electronics, pharmaceuticals, textiles, gems and jewelry, and transportation equipment--all major contributors to India's export basket--are now facing significant barriers in one of their largest markets. According to the report, the seafood industry alone could lose Rs 24,000 crore, while textile exporters are already halting US-bound production due to lost cost competitiveness against Vietnam and Bangladesh.

Morgan Stanley estimated that if tariffs on all Indian goods remain at 50%, the direct impact could be 60 basis points, with indirect effects raising the total hit to growth to 1.2 percentage points. "A similar sensitivity analysis for the 67% of non-exempted goods suggests that the direct impact could be 40 basis points, while the indirect impact could be the same magnitude, bringing the total impact to 80 basis points," the report added.

Also Read: Goldman Sachs Cuts India's Growth Forecast Amid U.S. Tariff Worries

If tariffs remain high for a year, Morgan Stanley expects Indian policymakers to respond. To further cushion domestic demand, the RBI may cut interest rates by up to 75 basis points, including a 50-basis-point cut above its current baseline. Fiscal consolidation may also take a back seat as the government increases capital spending to offset export weakness.

These recent tariffs raise new concerns about India's trade reliance and the importance of diversifying export destinations and expediting trade agreements, particularly with emerging markets.