Impact of US Tariffs on India's Economy: An Analysis

US tariffs on Indian exports, raised to 50%, are unlikely to significantly impact India’s growth due to its limited export dependency, as per S&P Global Ratings. Moody’s predicts a minor 0.3% GDP dip in 2025-26, while strong domestic demand and services will offset losses. Key sectors like pharmaceuticals remain exempt, and India’s diversified oil imports reduce energy risks. Despite challenges to manufacturing ambitions, India’s large domestic market and "China plus one" strategy attract investments, ensuring resilience amidst evolving trade dynamics.

The imposition of higher tariffs by the United States on Indian exports has sparked debates regarding its potential impact on India's economic growth and trade dynamics. This article consolidates insights from S&P Global Ratings, Moody's Ratings, and the State Bank of India (SBI) to provide a comprehensive overview.

Limited Impact on India's Growth

S&P Global Ratings Director YeeFarn Phua emphasized that the 50% tariff on Indian goods, announced by US President Donald Trump, is unlikely to have a significant impact on India's economic growth. He stated that India is not heavily reliant on exports, with exports to the US accounting for only 2% of its GDP. Sectors such as pharmaceuticals and consumer electronics, which contribute significantly to India's exports, are currently exempt from the tariffs. S&P estimates India's GDP growth for the current fiscal year at 6.5%, unchanged from the previous year, and projects a positive outlook for India’s sovereign ratings.

Moody's Ratings’ Perspective

In contrast, Moody's Ratings suggested that the tariffs could reduce India's economic growth by 0.3 percentage points in 2025-26, bringing it down from the projected 6.3%. The agency warned that the widened tariff gap compared to other Asia-Pacific countries (e.g., Japan at 15% and Vietnam at 20%) could hinder India's ambitions in manufacturing, particularly in high-value sectors like electronics. However, Moody's noted that strong domestic demand and a robust services sector would cushion the impact.

India’s Trade with the US: Key Statistics

Despite the tariff challenges, the US remains India's largest trading partner. In 2024-25, bilateral trade between the two nations reached USD 186 billion, with India exporting goods worth USD 86.5 billion and importing USD 45.3 billion. India maintained a trade surplus of USD 41 billion during this period. Pharmaceuticals and consumer electronics, critical export sectors, are exempted from the tariffs, mitigating potential earnings losses.

Energy Dynamics and Diversification

The additional tariffs are seen as a response to India’s continued purchase of Russian oil, which accounts for about 35% of its imports. SBI highlighted the potential repercussions if India halts Russian oil imports, estimating an increase in the fuel import bill by $9 billion in 2025-26 and $11.7 billion in 2026-27. However, India has diversified its oil supply, sourcing from 40 countries, including Guyana, Brazil, and Canada.

Challenges and Opportunities

Moody’s noted that the higher tariffs create challenges for India’s manufacturing sector and could reverse recent investment gains. However, many businesses investing in India are primarily targeting its large domestic market, driven by a growing middle class. The "China plus one" strategy has further bolstered India’s attractiveness as an investment destination.

Pharmaceutical Sector: A Double-Edged Sword

The SBI report highlighted that a potential 50% tariff on pharma exports could reduce earnings for Indian pharmaceutical companies by 5-10% in FY26, as the US accounts for 40-50% of their revenues. Yet, the US could also face repercussions, given India's pivotal role in supplying affordable, high-quality medicines, particularly life-saving drugs for oncology, chronic diseases, and antibiotics.

While the additional tariffs present challenges, India's strong domestic demand, diversified trade partnerships, and resilient services sector are expected to mitigate the impact. The time before the August 27 implementation of the tariffs offers an opportunity for negotiation between the two nations, potentially easing trade tensions and fostering mutual benefits.