New Delhi: India’s economy is bracing for significant challenges due to steep tariffs imposed by the US, particularly affecting its export-driven sectors such as textiles, gems and jewellery, and marine products, as highlighted by Aurodeep Nandi, India Economist at Nomura. With 30-40% of India’s export basket directly impacted, and potential repercussions for fuel and job growth, Nandi warns of a tough road ahead for these segments, especially the MSMEs.
The U.S. Tariff Impact on Indian Exports
The recent increase in U.S. tariffs threatens to shake the foundation of India’s export-heavy sectors, including textiles, gems and jewellery, food, and marine products. Aurodeep Nandi, the India Economist at Nomura, emphasizes that while some sectors like smartphones, pharmaceuticals, and petroleum products remain unaffected by the tariff hikes, nearly 30-40% of India’s total export basket is directly vulnerable. This means these industries could face serious hurdles in the coming years. For example, textiles—a sector that employs millions—now faces tariffs rising to 50%, a substantial increase from the previous rates of 10-20%. Such shifts inevitably lead to a competitive disadvantage against global peers.
Nandi warns, “The direct hit is on exports, but the second-round effect will be felt in jobs and demand.” If these tariffs persist until FY26, the recovery for these sectors is predicted to be “slow and uneven.” The ramifications could extend beyond just financial losses; entire communities that rely on these export industries may face increased unemployment and diminished economic activity. Specifically, the informal economies around these export hubs could experience a ripple effect, leading to decreased consumption demand across various sectors.
Revised GDP Growth Forecasts
In light of these challenges, Nomura has revised India’s GDP growth forecast for FY26 down to 6% from an earlier estimate of 6.2%. This adjustment accounts for the expected decline in exports and a slower recovery of private capital expenditure—two pillars critical for economic growth. As Nandi states, “Private investment is already subdued, and with this uncertainty, companies will take a backseat.” The festive season and potential GST tax cuts may provide some short-term relief, but overall sentiment is dampening. For businesses that have invested heavily in export sectors, these fluctuations pose an existential threat.
The situation complicates further as MSMEs, which comprise a significant portion of India’s economy, are now viewing potential relocation to overseas markets as a viable option. This concern is further exacerbated for those in the gems and jewellery sector who lack the financial flexibility to absorb the steep tariff hikes. With each passing day, the looming tariffs raise questions about the sustainability of specific industries—especially those already grappling with economic inefficiencies.
Government Intervention and RBI’s Role
On the governmental front, Nandi indicates that while initiatives like GST rationalization and reform could eventually help ease business costs, any immediate relief from the tariff shocks seems unlikely. He also posits that the Reserve Bank of India (RBI) may need to intervene sooner rather than later. “We expect 50 basis points of cuts—25 bps in October and another 25 bps in December. Growth and inflation are both tracking lower than RBI’s forecasts, making this an appropriate time to continue the easing cycle,” he notes. Such interventions may be critical in stabilizing the economy, especially as businesses grapple with increasing operating costs fueled by tariffs.
The RBI’s monetary policies could offer some respite from the pressures inflicted by rising tariffs, ensuring that the flow of capital remains viable for struggling sectors. The central bank’s focus on fostering an environment conducive to growth will be tested as the nation navigates these turbulent waters. There is reason to hope that judicious policy-making may help cushion the blow while promoting investments in crucial segments that can sustain long-term economic momentum.
Looking Ahead: A Call for Resilience
Despite the daunting outlook, there is potential for resilience within India’s economy if the challenges posed by U.S. tariffs can be effectively addressed. Nandi’s emphasis on the importance of swift adaptations in policy could pave the way for new opportunities and boost sectors capable of weathering this storm. Industries such as pharmaceuticals and technology, which currently enjoy tariff exemptions, may serve as benchmarks for growth during this turbulent phase. Moreover, the impending festive season could stimulate some demand and help bolster consumer sentiment, providing a lifeline for struggling industries.
However, as these developments unfold, the broader narrative remains one of caution and foresight. The Indian economy, while robust, will need to navigate these external pressures judiciously, ensuring that its labor force remains protected and its industries competitive on the global stage. The ongoing economic adjustments and potential realignments in trade policies emphasize the indispensable need for innovation and agility among Indian businesses, particularly amongst MSMEs who stand on the front lines of this evolving landscape. As we look to the future, addressing these challenges will be critical for sustained growth and local employment in a rapidly changing global economy.
Bankerpedia’s Insight💡
The imposition of steep US tariffs poses a significant threat to India’s export-centric sectors, particularly textiles and gems. This vulnerability can ripple through the economy, affecting employment and consumption patterns, especially for MSMEs that lack the financial cushion to adapt. With GDP growth forecasts trimmed and private investment hesitating, the banking and finance sector may face increased pressure. For individuals and businesses, staying informed about potential economic shifts and diversifying investments can help mitigate exposure to these challenges. Awareness and adaptation will be key in navigating this turbulent landscape.
What Does This Mean for Me?🤔
- Salaried Person → Job security may decline and purchasing power could shrink.
- Business Owner → Increased costs and reduced demand for export-focused businesses.
- Student → Job opportunities may decline, affecting student employment prospects.
- Self-employed → Export challenges may impact income and business sustainability.
- Homemaker → Increased costs and reduced job opportunities for family.
- Retiree / Senior Citizen → Job losses may diminish support and services for seniors.
- Job Seeker → Job opportunities may decrease in export-heavy sectors.
- Farmer / Rural Citizen → Higher tariffs may reduce jobs and demand for exports.
Research References📚
- economictimes.indiatimes.com
- RBI
- SEBI
- Ministry of Finance
- NABARD
- Department of Financial Services (DFS)
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