Is India prepared for the impact of Trump's 26% tariffs?

US President Donald Trump slapped India with some of the highest tariff rates imposed on any major US trading partner, saying his good personal ties with Prime Minister Narendra Modi did not affect his decision.

The Trump administration imposed a 26per cent tariff on imports from India, which is slightly higher than the 20per cent levy for the European Union, the 24per cent for Japan and the 25per cent for South Korea. China was hit with one the highest rates for a major US trading partner and now faces a tariff of at least 54per cent on many goods.

The tariffs are a setback for the Indian government, which had sought to ward off the new levies by rolling out sweeping concessions on issues central to Trump’s agenda. During a visit to Washington by Prime Minister Narendra Modi in February, the two nations agreed to work toward a trade pact this year.

“India, very, very tough. Very, very tough,” Trump said at a news event at the White House on Wednesday to announce the tariffs. “The prime minister just left, and he’s a great friend of mine. But I said, you’re a friend of mine, but you’re not treating us right. They charge us 52per cent .”

The levies are likely to ratchet up pressure on officials in New Delhi to hash out a trade pact with Washington to win a reprieve, as per a Bloomberg report.

Ahead of the move, the Trump administration has been signaling India would be a target of the new duties, given that New Delhi charges some of the highest tariffs of any major economy. Trump has repeatedly criticised India’s high levies, branding the country as the “tariff king.”

Pressure on India

Before the reciprocal announcement, the US tariff rates were among the lowest, with simple average tariffs at 3.3per cent , compared with India’s 17per cent , the White House said.Over the past few weeks, India overhauled its tariff regime, reducing import duties on some 8,500 industrial items, including on prominent American goods like bourbon whiskey and high-end motorcycles made by Harley-Davidson Inc., satisfying a longtime grievance of the US president.

India also indicated its willingness to buy more American oil, LNG and defense equipment to narrow its bilateral trade surplus. Officials have also signaled that more tariff cuts would be in the offing.

The levies will add further pressure on India to make even deeper cuts to its tariff regime. As a part of the discussions, India is considering US demands of duty cuts on US farm products, Bloomberg News reported last week. Officials were optimistic of a favorable outcome in wake of these concessions.

The new duties could also push New Delhi to yield to the US demand on dismantling non-tariff trade barriers, such as opaque import restrictions and licensing requirement on some imports.

Trump and Modi held multiple meetings during the US president’s first term. The US over multiple administrations has cultivated India as a regional partner and a bulwark against a more assertive China.

Impact on Indian economy

The US duties risked pushing India closer to alternative trade blocs and strategic partners, Nigel Green, CEO of global financial advisory deVere Group, told Reuters.

“(This) makes Indian exports immediately less competitive … it dents investor confidence just as India is trying to attract global capital fleeing China,” he said.

However, a recent SBI Research report said that the impact of Trump’s tariffs is likely to be limited. This sentiment is echoed by several global research and ratings firms and banks such as Goldman Sachs, Nomura, Morgan Stanley and Fitch.

According to the SBI analysis, the potential impact of US tariff reciprocity on Indian exports would be modest. It projected a reduction of approximately 3 to 3.5 per cent.

The report indicates that India’s strategic approach to export diversification, emphasis on value addition, exploration of alternative markets, and development of new trade routes from Europe to USA through the Middle-East would offset the effects of US tariffs.

Goldman Sachs notes that India’s gross exports to the US is one of the lowest among its Emerging Market peers. Fitch says India’s low reliance on external demand makes it ‘somewhat insulated’.

Morgan Stanley said, “While India is exposed to direct tariff risks, we have consistently highlighted that the bigger effect on growth from tariffs likely comes via the indirect transmission channel of weaker corporate confidence from heightened policy uncertainty and the spillovers to capex and trade cycle. From this perspective, India’s low goods trade orientation and ability to generate domestic demand offset mean it is among the least exposed economies within the region from an indirect effect standpoint.”

Despite the impact from Trump’s tariff moves, global economists believe India will continue to be the fastest growing economy in the world. According to the IMF’s January World Economic Outlook, India will become the world’s third-largest economy in the coming years.

Based on Nomura’s recent findings, India stands as one of Asia’s most resilient economies in the ongoing trade conflict.

Ajay Sahai, director general at the Federation of India Export Organisations, said the reciprocal tariff on India was lower than key competitors like Vietnam and Bangladesh, which could help Indian apparel and footwear sectors.

Sectors that will be hit hard by the tariffs

Indian textiles, engineering goods, electronics, and gems and jewellery sector exporters are expected to be hit hardest by the tariffs.

Ajay Bagga, a banking and international stocks expert told ANI that these tariffs are based on exaggerated calculations, which include actual customs duties, alleged currency manipulation, and GST. He described the shift in US trade policy as moving from “America First” to “America Alone.”

He said, “Indian domestic sectors are protected from first-level effects, but Indian textiles, engineering goods, electronics, and gems & jewellery exporters are immediately impacted. Metals are seeing a sell-off this morning, along with oil. Pharma majors are in wait-and-watch mode as sectoral tariffs will be levied on these.”

India & US’ trade ties

PM Modi, who was one of the first foreign leaders to meet Trump after his return to the Oval Office, recently lavished praise on the US president, underscoring their close personal ties. The two nations agreed to conclude the first tranche of a trade deal by the fall of this year and boost bilateral trade to $500 billion by 2030, up from $127 billion in 2023, following the meeting.

From 2021-22 to 2023-24, the US was the largest trading partner of India. The US accounts for about 18 per cent of India’s total goods exports, 6.22 per cent in imports, and 10.73 per cent in bilateral trade.

With India, America has a trade surplus (difference between imports and exports), of $35.32 billion in goods in 2023-24. It was $27.7 billion in 2022-23, $32.85 billion in 2021-22, $22.73 billion in 2020-21 and $17.26 billion in 2019-20.

Full list of countries and how much reciprocal tariff Trump has imposed:

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