Higher-Than-Anticipated Tariff Impacting India’s Economy
The blanket 26% tariff on all Indian products imposed by U.S. President Donald Trump has rattled markets and analysts, with experts noting that the hit to India’s economy could be worse than expected. International brokerage firm Macquarie has warned that a tariff of over 20% could shave off 50 basis points (bps) from India’s GDP, while the International Monetary Fund (IMF) estimates a $30 billion hit, roughly 0.7% of India’s projected $4.3 trillion GDP by the end of 2025.
“The announced tariffs are more severe than anticipated. While the market had expected the effective tariff rate to be in the high teens, the actual rates are now projected to be in the mid-to-high 20% range – possibly the highest we have seen in a century,” said Arindam Mandal, Head of Global Equities at Marcellus Investment Managers.
Currency Impact and RBI’s Response
Goldman Sachs noted that the total effective tax rate on Indian exports will rise by 19.5%, increasing the strain on Indian businesses. The brokerage expects the Indian Rupee to weaken against the U.S. Dollar but does not anticipate aggressive intervention by the Reserve Bank of India (RBI) to defend the currency.
Highlights from the Economic Impact:
$30 billion potential loss in India’s GDP due to tariffs.
Goldman Sachs expects the rupee to weaken but with minimal RBI intervention.
Tariff rates now projected in the mid-to-high 20% range, up from market expectations in the high teens.
India is negotiating a bilateral agreement to mitigate the impact.
Morgan Stanley: India Less Exposed Due to Domestic Demand
While acknowledging the direct risks posed by tariffs, Morgan Stanley argued that India’s strong domestic demand and low reliance on goods trade would soften the overall impact.
“India’s ability to generate domestic demand offsets some of the risks. The indirect impact on corporate confidence, policy uncertainty, and investment cycles may be a bigger concern than the direct tariff shock,” noted Morgan Stanley.
Pharma Firms Stand to Benefit from Tariff Exemptions
Despite the broader economic hit, pharmaceutical firms emerged as unexpected winners after Trump’s tariff announcement. According to a White House factsheet, pharma products, copper, semiconductors, and lumber articles are exempt from reciprocal tariffs.
This exemption has reversed the bearish trend in Indian pharma stocks, which have suffered over the past six months due to weak investor sentiment. CLSA, a Hong Kong-based brokerage, expects a rebound in the Nifty Pharma index, which had declined nearly 10% in the last six months.
Highlights from the Pharma Exemption:
Pharma, semiconductors, and copper exempt from the 26% tariff.
Nifty Pharma index may bounce back after a 10% decline in six months.
CLSA sees the sector as a key beneficiary of the policy change.
Trump Calls India a “Tariff King” Amid Tensions
While announcing the global reciprocal tariffs at the White House, Trump specifically mentioned India’s historically high tariffs on U.S. goods, calling India a “tariff king” and a “tariff abuser”.
“India, very, very tough. Very, very tough. The Prime Minister just left. 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 52%. You have to understand, we charge them almost nothing, for years and years and decades,” Trump stated.
The 26% tariff is being presented as a “kinder” version of what was initially considered, but experts argue it could still significantly disrupt India’s exports, corporate sentiment, and trade relationships.
Highlights from Trump’s Announcement:
Trump labeled India a “tariff king” and “tariff abuser.”
The 26% reciprocal tariff is lower than feared but still damaging.
Tensions between India and the U.S. over trade remain high.
India’s Response to the Tariff Blow
With India and the U.S. negotiating a bilateral agreement, the government may seek sector-specific exemptions or tariff reductions to ease the economic impact. Meanwhile, RBI and policymakers will closely monitor currency movements and corporate confidence, as investor sentiment remains fragile.
Industries like electronics, textiles, and auto exports may bear the brunt of the tariff hike, while pharma and semiconductor firms could capitalize on exemptions. The next few weeks will be critical in determining India’s countermeasures and its ability to absorb the economic shock.
