The US' planned tariff hikes on Indian exports could lower India’s GDP growth by 0.1-0.3 percentage points, with a steeper impact if wider tariffs are imposed, says Goldman Sachs. India’s exposure to US demand and a 6.5% tariff differential are key factors. High-risk sectors include metals, chemicals, and jewelry. Despite challenges, India remains optimistic, focusing on aligning US tariff plans with WTO norms and resolving concerns through upcoming trade talks. Collaborative efforts may strengthen bilateral economic ties.
The recently reported increase in the average effective tariff rate by the United States (US) on Indian exports might influence India's economic growth, with a potential reduction in gross domestic product (GDP) growth by 0.1-0.3 percentage points, according to a Goldman Sachs report published on Wednesday. Despite the challenges, India's proactive approach to addressing these issues reflects a positive outlook.
The analysis factors in various scenarios, including the US government's planned reciprocal tariffs set for early April and the sensitivity of US demand for Indian products. In a more extensive scenario where the US imposes additional tariffs on all trading partners, the impact on India's GDP growth could be steeper—ranging from 0.1 to 0.6 percentage points. This heightened vulnerability is attributed to India’s significant domestic economic exposure to US demand, which constitutes approximately 0.4% of GDP when considering exports to other nations that ultimately depend on the US market.
Under the "Fair and Reciprocal Plan," the US administration aims to align its trade practices with those of its global partners by equalizing tariffs, taxes, and non-tariff barriers. Goldman Sachs highlights three potential channels through which India could be impacted: country-level reciprocity, product-level adjustments, and broader measures involving non-tariff barriers.
The country-level approach, which would involve raising tariffs on all US imports from India, is the simplest to implement. Notably, India’s effective tariff on US imports stands at 9.4%, significantly higher than the 2.9% charged by the US on Indian exports, resulting in a tariff differential of 6.5 percentage points. This discrepancy may become a focal point in trade negotiations.
On the other hand, product-level reciprocity, where the US matches India's tariffs on specific goods, could increase the average tariff differential by 11.5 percentage points. However, this method is more complex and would require a longer timeline for execution. The report also notes that incorporating non-tariff barriers into reciprocity measures could result in an even more intricate system, potentially leading to higher tariffs.
Despite these potential hurdles, Indian officials remain hopeful about finding common ground with the US. A senior government representative expressed optimism, stating that the US is expected to “take care” of India’s concerns regarding higher import levies on steel and aluminum, as well as the proposed reciprocal tariffs, during forthcoming bilateral trade discussions. These discussions are anticipated to begin in the coming weeks.
India is also closely analyzing the specifics of the US' proposed reciprocal tariff legislation to ensure its alignment with global trade norms under the World Trade Organization (WTO). This careful evaluation underscores India's commitment to fair and equitable trade practices.
Analysts at Citi Research have highlighted uncertainty for Indian exporters, estimating potential annual losses of approximately $7 billion due to reciprocal tariffs. High-risk sectors include metals, chemicals, and jewelry, followed by pharmaceuticals, automobiles, and food products.
While challenges remain, India's active engagement in addressing these issues is a testament to its resilience. Collaborative trade discussions could pave the way for mutually beneficial solutions, fostering stronger economic ties between the two nations.
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