With tariffs, India’s growth rate needs a careful watch, pg 8

Key Highlights:

• The US imposed 25% reciprocal tariffs on India’s exports effective August 7, 2025.
• An additional 25% penal levy on India’s exports, linked to oil imports from Russia, will come into effect on August 29, 2025.
• India’s merchandise trade surplus with the US stood at $41.18 billion in 2024–25 and has been increasing over time.
• The measures aim to narrow the trade gap, potentially impacting India’s exports and increasing crude import costs if supply shifts from Russia to the US.
• Estimates suggest reciprocal tariffs could reduce India’s exports to the US by 25%, widening the trade deficit by about 0.56% of GDP and lowering GDP growth by 0.6%.
• The Current Account Deficit (CAD) could rise from 0.6% to 1.15% in 2024–25 due to the tariffs.
• New trade agreements, rupee depreciation, and market diversification may partially offset the negative impact.
• Combined reciprocal tariffs and penal levy could reduce GDP growth by over 0.6 percentage points in 2025–26.

Detailed Insights:

• The reciprocal tariffs represent a significant non-tariff and tariff barrier that challenges India’s external trade position. Given India’s export surplus with the US, the measures aim to reduce this imbalance while exerting indirect pressure on India’s crude import strategy. The penal levy effectively acts as a foreign policy tool, linking trade penalties to geopolitical decisions.
• The economic impact includes a sharp potential fall in exports to the US, widening of the trade deficit, and higher CAD. The estimated import elasticity with respect to tariffs at (-)1 implies a high sensitivity of export volumes to tariff hikes. The penalties may also lead to costlier crude imports, adding to domestic inflationary pressures and worsening the exchange rate.
• Mitigation strategies include leveraging ongoing trade negotiations with the US, diversifying export destinations, and reducing domestic import tariffs that hinder export competitiveness. Agreements with other economies (e.g., UK FTA, prospective EU pact) and rupee depreciation could offer partial relief. However, prolonged tariff imposition risks a structural slowdown in export growth and persistent CAD pressure.
• Diplomatically, India may need to rally support against discriminatory trade measures, positioning them as contrary to free and fair trade principles.

Concepts Involved:

• Reciprocal Tariffs: Trade measures where one country imposes tariffs equivalent to those faced by its exports in another country.
• Penal Levy: Additional tariff imposed as a punitive measure, often tied to geopolitical or policy disagreements.
• Current Account Deficit (CAD): When a country’s total imports of goods, services, and transfers exceed its exports.
• Import Elasticity with respect to Tariffs: Measure of how sensitive import or export volumes are to changes in tariff rates.
• Trade Diversification: Expanding export destinations to reduce dependency on a single market.
• FTA (Free Trade Agreement): Pact between two or more countries to reduce trade barriers and increase trade in goods and services.