Passing the trade-mill test

Between fiscal 2019 and 2025, India’s exports grew a steady 5% annually to $438 billion.

Imports climbed a notch faster, at 6% a year, to $721 billion, led by energy items.

With focus on manufacturing, including in several new areas, and policy spurs all around, India would have hoped to close the deficit in quick time despite heightened geopolitical uncertainties and a moderation in global trade and economic growth.

Then came the US tariff blow on its trading partners.

While negotiations are still on, and some give and take by the affected countries is wont, a realignment of global trade is on the cards.

On India, the US has slapped an additional 25% tariff, raising the burden to 50%, ostensibly for continuing to procure crude oil from Russia.

Suddenly, India’s resilience is being tested again.

The US is no ordinary trade partner after all; it holds centre stage in the global supply chain by virtue of being a huge consumer market. US goods imports in 2024 alone were ~$3.35 trillion, or 14% of global imports.

Between fiscals 2019 and 2025, India’s imports from the US grew a modest 4% a year to $46 billion, with crude oil, petroleum, coal products, aircraft and parts among the key items.

Exports ran up much faster, clocking a breezy 9% a year to $88 billion, making the US India’s largest export destination, with ~20% share of merchandise exports, led by pharmaceuticals, textiles, gems and jewellery, engineering goods, marine products and chemicals.

Based on the assessment of the total goods exported to the US from India and the exemption granted to these sectors, we believe ~55% of the goods currently being exported to the US face high tariff risk. This has increased the downside risk to our GDP growth outlook of 6.5% for this fiscal.

The current tariff places India in an unfavourable position compared with competing nations such as Vietnam, South Korea and Indonesia, whose tariffs are much lower.

For example, at the previous levy of 25% on India’s exports to the US, the tariff disadvantage against Bangladesh (which exports almost double the value of textile to the US in comparison) was only 5%. This could have been managed by a mix of price negotiations between Indian manufacturers and the US-based importer.

Now, with differential tariff rates of ~30% in favour of such peer countries, Indian companies may face challenges in evaluating export opportunities thus impacting their revenues and profitability. This will hold back export-focussed companies from fresh investments at least for a quarter.

We believe such a steep tariff could be a part of hard negotiation tactics and the final tariff, post-negotiations, could be lower, as seen in trade negotiations between US and other countries. For instance, in April, tariffs by the US on China increased, with similar overnight jump bringing it to 145%. However, tariffs eventually settled at a substantially lower rate.

To mitigate the potential impact of US tariffs on its exports, India can focus on four opportunity levers.

First, explore bilateral tie-ups while harnessing the benefits of the recently concluded India-UK trade deal, apart from accruing benefits from free trade agreements with Australia and the UAE. Accelerating trade discussions with the European Union, which is another major consumption market, can provide alternative opportunities, too.

Second, even as the trade winds change direction, India can build its cost-competitiveness by easing non-trade barriers such as complex customs procedures and can focus on reforms on land and labour, expanding investment-linked incentives for backward integration across more sectors.

Third, India can continue to focus on logistics efficiency. Expressways, economic corridors, digital tolling and adoption of green fuel have collectively helped reduce logistics costs in the country to ~10% of the GDP. Domestic value addition in energy and electronics sectors can be ramped up to reduce the risk of high import dependence on intermediates or raw materials, especially from China.

Fourth, research and development, currently just ~0.6% of GDP, should be priority. In fact, the government recently approved the Research Development and Innovation Scheme, which will provide Rs 1 lakh crore to encourage the private sector to scale up RDI in sunrise domains. Also, by facilitating access to global technologies, as well as by implementing upskilling/reskilling programmes for the workforce, India can raise its R&D game.

The matrix of responses to the unfolding challenges needs to be broad-based, focussing both within and without.

Steps to bolster India’s resilience further through facilitative policies and incentives, leveraging the ongoing favourable business cycle domestically, opening trade parleys with more importer-nations, and continuously climbing up the ease of doing business ladder are essential to create incremental growth offsets.

This is no ordinary test, after all.

END OF ARTICLE