US Tariffs on India: Impact on GDP, Inflation

New Delhi, Aug 1 (PTI) The impact of 25 per cent tariff on Indian exports will be worse for the US compared to India as America may face a lower GDP, higher inflation and a weaker dollar, SBI Research said on Friday, calling implementing the tariff a "bad business decision".

On July 30, US President Donald Trump announced the imposition of a 25 per cent tariff on all goods coming from India, plus an unspecified penalty for buying Russian crude oil and military equipment. While August 1 was the tariff deadline, the new levies will come into effect from August 7.

Stating that the imposition of high tariffs on India with a penalty is a "bad business decision" by the US, but the "mysterious forces" of the global supply chain should automatically adjust and cushion the impact of high tariffs.

"Surprisingly, the US GDP, inflation and currency face a greater risk of downgrades compared to India...The economic implications for the current trade stalemate, not surprisingly, the impact on the US will be worse compared to India with a lower GDP and higher inflation and a weaker dollar," SBI Research said in a report.

US President Donald Trump has announced 25 per cent tariffs on India, plus a 'penalty' for its trade with Russia. The tariffs will come into effect from August 7.

SBI Research said the US is beginning to show signs of renewed inflationary pressure, driven by the pass-through effects of recent tariffs and a weaker dollar - particularly in import-sensitive sectors such as electronics, autos, and consumer durables.

US inflation is expected to stay above the 2 per cent target through 2026, driven by supply-side effects of tariffs and exchange rate movements.

"US tariffs are projected to cost the average US household about USD 2,400 in the short term, mainly due to higher prices from tariff-driven inflation. Low-income families may lose around USD 1,300, nearly triple the relative burden compared to high earners, while high-income households could face losses of up to USD 5,000, though with less impact on their overall financial stability," SBI Research said.

SBI Research said that though the US is India's top exporter (20 per cent shares in FY25), yet India has diversified its export destinations, and the top 10 countries only accounted for 53 per cent of total exports.

Electronics, gems and jewellery, pharmaceuticals and nuclear reactor & machinery account for 49 per cent of India's exports to the US.

The earlier tariff imposed by the US on such articles varied from zero per cent - on diamonds, smartphones, pharma products, among others - to a maximum of 10.8 per cent. Now all of them will face a 25 per cent tariff.

In the generic drug market, India supplies nearly 47 per cent of the pharmaceutical needs of the US. If the US shifts manufacturing and API production to other countries or domestic facilities, it will take a minimum of 3-5 years for meaningful capacity.

"So, tariff may lead to drug shortages and price increase for American citizens. As the US accounts for 40 per cent of India's pharma exports, if 25 per cent tariff continues, it may hit earnings of pharma companies by 2-8 per cent in FY26, as many big pharma companies' revenue from the USA stood in the range of 40-50 per cent," SBI Research said.

The top items that India exports to the USA include electrical machinery parts, precious stones, pharmaceutical products, textiles, and chemicals, Kaushik Das, Chief Economist (India, Malaysia, and South Asia) at Deutsche Bank, said in India Economics Weekly.

Deutsche Bank said the top items that India exports to the US include electrical machinery parts, precious stones, pharmaceutical products, textiles, and chemicals.

"Naturally, these sectors will be the most affected due to the 25 per cent punitive tariff. India runs a trade surplus with the USA that increased from USD 11 billion in FY13 to USD 43 billion (1.1 per cent of GDP) by FY25," Deutsche Bank Chief Economist (India, Malaysia, and South Asia) Kaushik Das said.

Between April-June '25, India's trade surplus has touched USD 12.7 billion, up 35.4 per cent Year-on-Year (YoY), led by a front-loading of exports to the US (22.3 per cent YoY) relative to imports from the US (11.7 per cent YoY), he said.

This front-loading helps to buy some time for Indian exporters, probably for a couple of months, to absorb the impact of higher tariffs, Sen added.