India considers US tariffs in exchange for trade deal

Ongoing bilateral trade discussions between India and the US have become crucial for the South Asian nation, especially after being penalized with a reciprocal tariff of 26%.

Economists suggest that while India has managed to avoid the excessive rates applied to regional competitors like Vietnam and Bangladesh, the tariffs make a bilateral agreement essential for New Delhi, which is trying to mitigate the impact on approximately $80 billion worth of exports to the US.

With India’s gross domestic product growth expected to slow to 6.5% in the fiscal year ending March 2025, down from 8.2% in the previous fiscal year, the current tariff levels could inflict a further blow of 70 to 90 basis points, potentially resulting in an export revenue loss of around $30 billion.

“This is a very significant impact, and it’s not a pleasant one at all,” Dhiraj Nim, an India economist at ANZ bank, told Nikkei Asia.

India’s exports in sectors such as electronics, jewelry, and automobiles are among the most affected by the tariffs imposed by US President Donald Trump. For now, the Trump administration has exempted pharmaceutical exports from tariffs.

S C Ralhan, president of the Federation of Indian Export Organizations, stated to local media on Thursday that the relatively lower tariffs imposed on India’s exports could provide an advantage against Asian competitors like China and Vietnam, which have been hit harder.

With this glimmer of hope, Indian stock indices seemed to weather the tariff news better than their Asian counterparts, with the benchmark Nifty 50 and Sensex indices down by approximately 0.2% and 0.27%, respectively, by midday. The Indian rupee weakened to 85.78 against the dollar at the open but recovered to 85.64 by midday.

The Nifty Pharma index outperformed the broader market, rising over 2% by midday.

Economists suggest that the relatively milder tariffs announced against other major economies, coupled with hopes for a bilateral agreement, have supported sentiment in Indian markets.

“The [muted fall] suggests that the markets think that this 26% is unsustainable and this is somewhat of a ceiling tariff rate, and negotiations will bring it down,” Nim added.

A team of US officials visited India last week as part of trade talks aimed at increasing trade between the two countries to $500 billion by 2030. The Indian government stated on Thursday that discussions are ongoing “for an early conclusion of a mutually beneficial, multi-sectoral Bilateral Trade Agreement.”

Unlike China, Canada, and the European Union, India has adopted a more conciliatory stance in response to Trump’s warnings about Washington’s trade deficit (which stands at $45 billion in India’s case), and earlier this year, it reduced tariffs on large motorcycles, luxury cars, and bourbon to appease the US.

According to Bloomberg last week, India is now considering reducing tariffs on agricultural products such as pulses and soybeans, as well as on electric vehicle imports, according to Reuters, which is a major sticking point for Trump ally and Tesla CEO Elon Musk, whose electric vehicle manufacturer has yet to establish a presence in the world’s third-largest automobile market.

In a fact sheet accompanying the tariff announcements, the Trump administration targeted India’s “uniquely burdensome and/or duplicative testing and certification requirements,” stating that removing these barriers would increase US exports by at least $5.3 billion per year.

Sujan Hajra, chief economist at brokerage firm Anand Rathi, wrote in a note: “India’s merchandise trade surplus with the US is far lower than that of China ($320 billion), Mexico ($180 billion), Vietnam ($120 billion), or Germany and Ireland (each at $90 billion). This strengthens India’s position in negotiating a tariff reduction.”

However, economists caution that even with a bilateral trade agreement, India will not be immune to the impact of a potential global trade war that Trump’s “tariff man” declaration threatens to unleash.

“Slowing US growth and weaker global trade momentum will weigh on external demand [for India],” Morgan Stanley Research stated in a note.

“More importantly, we expect this impact to be more visible through the indirect channel of weaker corporate confidence, which will further delay the investment spending cycle [for the country],” it added.

According to economists, this situation may lead to further policy support in India. Morgan Stanley economists suggest that the Reserve Bank of India may shift its stance from neutral to accommodative at its next monetary policy announcement on Wednesday, while Nim from ANZ said that the possibility of a 50-basis-point cut in the benchmark policy rate has “risen significantly.”