Large sections of Indian industry, including sectors that are seen to be relatively more vulnerable to the reciprocal tariffs by the US, appeared largely unperturbed on Wednesday ahead of the Donald Trump’s administration’s imminent disruptive move.
Several key industries that have high interest in the lucrative US markets, including electronics, pharmaceuticals, auto parts, and gems & jewellery, feel import duty cuts by New Delhi would be the best way to mitigate any adverse impact on their shipments. This will reduce the tariff gap between the two nations, which is a substantive 5% on a country-wide basis and much higher for scores of individual products.
Even after the reciprocal levies are announced by the US, New Delhi would have the window to lower its tariffs, and urge the US to readjust its levies in keeping with the reciprocity principle.
Zero-for-zero tariff policy might work for India in sectors like pharmaceuticals and gems & jewellery, and to a certain extent, even textiles & garments, analysts feel. Many trade experts also reckon that India could withstand reciprocal tariffs without retaliation, while others recommend an approach that combines accommodation with selective retaliation.
While the nature and scope of the US’ additional tariffs on merchandise shipments from India remained “amorphous,” the government here opted to remain circumspect and tight-lipped. While commerce and industry minister Piyush Goyal had said the industry was “excited” about the quick-paced negotiations for a bilateral trade agreement (BTA) with the US, he also asked some elements of it to not seek “over-protection.”
Government circles and independent analysts also feel Trump’s reciprocal tariffs could create opportunities for the country in several sectors. Niti Aayog pointed out that unlike Mexico, China and Canada, which account for 50% of the US’s total imports and face 20-25% tariffs, India is “favourably placed.” For India, in many instances, an increase in influx of imported inputs could make domestic value addition more efficient. Domestic companies in many export-intensive sectors could potentially make incremental gains in export markets from the relatively higher tariff walls major competitors like China have started facing.
Analysts estimate reciprocal tariffs might chip away just about 0.1% or thereabouts of India’s gross domestic product. “With a tariff differential of 9%per cent and assuming that the elasticity of India’s exports to the US with respect to tariffs is minus 0.5 (implying a 1%nt rise in the tariff rate would reduce India’s exports to the US by 0.5%), there will be a loss of $3.6 billion in exports to the US, which is only 0.1% of India’s GDP,” Motilal Oswal said in a report. Emkay Global Financial Services too sees the hit to India to be 0.1%–0.12% of its GDP.
The real worry for India is that the extra tariffs by the US on all its trading partners could have a serious adverse fallout on the world economy. By showing total disregard for rules-based trade, Washington is risking cost increases, as the moves could draw retaliation from several countries.
Bloomberg Economics says a maximal approach would add up to 28 percentage points to average US tariff rates — creating a hit of 4% to US GDP and lifting prices by close to 2.5%, over a two-to-three year period.
The US’s move is being seen by analysts as a strategic opportunity to attract electronics manufacturing from China. India could lly capitalise on this only if it reduces import duties on US electronics to zero, matching the US’s near-zero tariff on Indian imports.
Of course, there are sectors that might feel the heat. With India exporting $5.72 billion worth of auto components to the US in FY24, accounting for 27% of the sector’s total exports, the extra 25% tariffs announced recently is set to disrupt supply chains and dent revenues. Unlike fully built vehicles, which India exports in limited numbers to the US, component exports are substantial, making them highly vulnerable to the tariff hike.
India has vulnerabilities with regard to its agriculture sector too, both in terms of reduced access to the US markets, and possible tariff cuts by India leading to rise in imports. For instance, the US could potentially flood Indian urban markets with farm goods like chicken legs, skimmed milk powder, soyabean and corn. India’s exports of fish, meat and processed seafood to the US could take a hit if US tariffs go up substantially.