New Delhi, Feb 13 (IANS): The direct impact of reciprocal tariff hikes by the US will likely be manageable but, the indirect impact through uncertainty weighing on business confidence is more worrisome. However, domestic policy will likely remain supportive of growth and incrementally more measures will be taken if downside risks emerge, according to a Morgan Stanley report released on Thursday.
Prime Minister Modi has reached the US on a scheduled visit to meet President Trump and the outcome likely will include increased imports of energy and defence equipment from the US (Global Times, February-25) and attempts at a mini-trade deal, which could help to lower tariff rates on key segments for imports from the US. As such, under the WTO, it will not be possible to lower tariff rates bilaterally, the report states.
President Trump has indicated that he may impose reciprocal tariffs which could impact India, given India has higher tariff rates vis-à-vis the US. Weighted average tariff rates imposed on US imports by India is at 8.5 per cent (adjusted for reduction in the recent budget) vs. tariff rates imposed by the US at 3 per cent, the report states.
Product-wise tariff differential is stark and key segments, which could come under pressure due to reciprocal tariff hikes are electrical, machinery, gems and jewellery, pharmaceuticals, fuels, textiles, iron and steel, autos, and chemicals, according to the report.
The US accounts for 17.7 per cent of India's goods exports, and India's trade surplus with the US stands at US$45.7bn, compared with other Asian countries such as China, Japan, Thailand and South Korea, India's trade surplus with the US is low. India has the seventh-largest trade surplus amongst nations with the US.
The report identifies three areas of concern. First, an increase in weighted average tariff rates by approximately 6 percentage points would likely be manageable. However, we worry that certain segments may get much higher tariffs, considering that India levies very high tariffs on certain segments like motorcycles (tariff rate of 30 per cent, reduced from 50 per cent earlier), which could push the weighted average tariff rate higher.
Second, an indirect impact from uncertainty stemming from tariff policies creating an overhang on business confidence and potentially lower global growth is another area of concern.
Third, the impact of uncertainty leading to risk aversion and strength in the US dollar weighing on central banks to effectively ease domestic financial conditions is also a downside risk.
For India, the weighted average tariff rate on imports from the US is likely to decline by 1 percentage point from 9.5 per cent (in 2022 per UNCTAD) to 8.5 per cent in 2025 due to the tariff reduction.
The report lists the outcome of PM Modi’s meeting with President Trump, US tariff-related policies and the trend in capital flows as important key factors.
The US has been a significant destination for India's exports, with its share in overall exports at 15.8 per cent in F2018 (pre-tariffs), while it rose to 16.9 per cent in F2020 and touched 17.7 per cent in F2024. Among key commodities that India exports to the US are electrical machinery, gems and jewellery, pharma products, textiles, autos iron and steel, autos and chemicals.
On the other hand, India comprises a rather tiny share of US overall imports, with its share at 2.1 per cent in 2017 and 2018, rising by 20bps to 2.3 per cent in 2019, and further up to 2.7 per cent as of 2024, registering a ~11.4 per cent CAGR from 2017 until now. As such, India runs a trade surplus with the US, tracking at US$ 45bn in CY24, making it the seventh-largest trade surplus amongst nations that have a trade surplus with the US.
The US is also an important market for India's services exports, with a share of 54 per cent in India's software service exports as of FY2024, as per RBI data. Within services, computer services comprise the highest share at 27 per cent, the report added.