Donald Trump tariffs to hurt India's economic growth; ongoing trade negotiations could be key to lowering rates

Staying true to his word, US President Donald Trump, this week, slapped reciprocal tariffs on close to 60 countries or trading blocs. While the 26 per cent tariffs levied on India are far lower than some of its Asian neighbours like China, Bangladesh, Thailand and Vietnam, they will still impact India's economy to some extent and hurt exports in a few sectors like auto components more.

Notably, tariffs will raise the prices of imported goods in the US, which in turn could hurt demand. The aftereffect will be a slowdown in the US economy eventually spilling into the global economy. That will dent exports. Also, manufacturers may not want to commit to fresh investments amid this uncertainty, which could impact domestic private capital expenditure recovery further.

Santanu Sengupta, chief India economist at Goldman Sachs, estimates a 30 basis points "drag" on India's growth in the current calendar year from the reciprocal tariffs. There is also likely to be another 20 bps growth drag from the services export slowdown, as US growth slows.

Overall, Goldman has lowered its GDP growth forecasts on India for 2025 and 2026 by 30 bps and 20 bps respectively to 6.1 per cent.

"There are risks of additional growth cuts depending on where tariff rates settle, which in part will depend on negotiations," said Sengupta.

The Reserve Bank of India's monetary policy committee meets next week in its first bi-monthly meeting for the 2025-26 financial year. The general expectation among economists even before the tariffs announcement was that the MPC would follow up on the 25 bps repo rate cut in February with a similar rate cut this time around, given cooling inflation.

With the expected growth lag now and inflation likely to drop below RBI's 4 per cent target in the January-March quarter, Sengupta expects there will be more interest rate cuts ahead. He sees an additional 50 bps of monetary policy easing in the current financial year (25 bps each in the second and third quarter), taking the overall rate cuts to 100 bps in the current cycle.

The incremental rate cuts, easier liquidity conditions and lower oil price forecast could provide a 20 bps offset to drag on growth due to the reciprocal tariffs, noted Sengupta.

Suresh Ganapathy, MD and head of financial services research at Macquarie Capital also sees a downside risk to Reserve Bank's 6.7 per cent GDP growth forecast for the 2025-26 financial year.

"Our primary reading is that in case the 26 per cent tariffs suggested by the White House is a blanket tariff applied across all India products, it could be pretty negative. This is much worse than what we had anticipated," said Ganapathy.

India and the USA are in the process of negotiating a bilateral trade agreement. This will have to be closely watched to see where rates eventually settle, he said.

Economists at Nomura, led by Sonal Varma, chief economist India and Asia ex-Japan, believe the ongoing trade negotiations could lower the tariff rate over coming months and they expect India to benefit from the ongoing supply chain shifts. Still, they have maintained a below-consensus GDP growth projection of 6 per cent in the current financial year ending March 2026, while remaining alert to downside risks.

The negative impact of the higher absolute tariffs that key exporting sectors will now face is somewhat tempered by India’s comparative advantage with its other competitors and sectoral carve-outs in the US announcement, note the Nomura economists. Pharmaceuticals, for instance, which account for over 10 per cent of Indian exports to the US haven't been taxed yet, but Trump has signalled they are imminent.

Still, several sectors are likely to be impacted by the tariffs.

"Compared with its Asian peers, India’s value added to exports to the US is particularly low for computers & electronics, machinery and equipment, and auto, but the levels are better for sectors such as chemicals, basic metals, textiles and apparel and other manufacturing. Manufacturers in sectors with lower value added and thinner margins are likely to face most turbulence from the tariff hikes," the Nomura economists said.

India also majorly exported marine food products, shrimps and prawns account for around 2.3 per cent of the exports to the US. There are concerns that India could lose some of its competitive edge to other suppliers such as Ecuador, where the tariff is lower at 10 per cent.

"If the trade deal fructifies as planned by the end of the year, a lot of the draconian tariffs imposed will likely prove temporary for India and there could be enhanced access to the US market. A bigger risk to growth will come from lower global growth, increased trade factionalism and the reluctance of manufacturers to revive the dampened capex cycle in India in the face of these uncertainties," said the Nomura economists.

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