Reciprocal tariffs: India may gain competitive edge but growth, exports to be hit

It’s a bittersweet moment of sorts for India, which had been hoping for a reprieve from reciprocal tariffs from the US due to the ongoing negotiations for a bilateral trade agreement (BTA). However, US President Donald Trump announced a “discounted” reciprocal tariff on India of 27%, which will kick in from April 9. Prior to that from April 5, a 10% universal tariff will be levied by the US on all imports coming into the country.

A closer look at the reciprocal tariff system formulated by the US shows that India is set to gain a competitive advantage compared to China and Vietnam that have been slapped with much higher tariffs of 34% and 46%, respectively. Similarly, the US also plans to levy a 37% tariff on Bangladesh and 36% on Thailand. The US will not levy any tariff on certain essential and strategic items such as pharmaceuticals, semiconductors, copper, and energy products like oil, gas, coal, and LNG. India’s steel, aluminium, and auto-related goods imports to the US will face a 25% tariff.

Indian government officials who were keeping a close watch on the US announcements all through Wednesday are now understood to be reviewing the impact of these policies. While Indian exports to the US may get a competitive advantage and could help India scale up its manufacturing capacities in the medium to long run, concerns abound about economic growth prospects as well as exports growth in the short term.

Sources pointed out that how the tariffs will be applied remains a crucial issue to understand and that would ultimately impact India’s overall prospects. Worries are also emerging over a trade led recession in the US economy that could hit the global economy.

As per an analysis by Emkay Global Financial Services, India’s exports to the US could drop by $30-$33 billion or 0.8-0.9% of GDP at 26% tariffs, without adjusting for cross country hits or responses.

A report by Macquarie highlighted that there is downside risk to the GDP projection of 6.7% by RBI for 2025-26 as against 6.5% in 2024-25 due to trade wars. “Note that pharma, semiconductors and some other sectors are exempted as of now and with BTA expected to be signed with US in later part of the year, we have to see what the eventual GDP implications are,” it said.

V.K. Vijayakumar, Chief Investment Strategist, Geojit Investments, pointed out that the biggest concern is that this will trigger retaliatory tariffs from other countries resulting in a full blown trade war, impacting global trade and global growth. “Higher inflation in the US will put the Fed in a tight spot; it would be difficult for the Fed to deliver the rate cuts expected by the market in 2025. The probability of a US recession by the end of 2025 has increased. This is bad news for the global economy and markets,” he underlined.

The US is India’s largest trading partner and biggest export market. According to commerce ministry data, India’s share in US’s imports increased from 0.9% in 2001 to 2.8% in 2023. In the same period, imports from India to the US increased by a CAGR of 10.48% compared to a 4.76% increase of imports from the rest of the world to the US.

A GTRI report highlighted that the imposition of higher reciprocal tariffs by the United States on several Asian countries, including China, Vietnam, Taiwan, Thailand, and Bangladesh, presents an opportunity for India to strengthen its position in global trade and manufacturing. “However, gains will not accrue automatically. India needs deep reforms for enabling scale production, domestic value addition and improving competitiveness to benefit,” it noted.

India could gain in sectors like garments and textiles vis-a vis Bangladesh as well as in electronics telecom, and smartphone sectors, countries like Vietnam and Thailand are likely to lose cost competitiveness due to the steep US tariffs.