US Tariffs to Trim India's GDP Growth by 30 bps

New Delhi, Jul 31 (PTI) The 25 per cent US tariffs, plus a penalty for Russian imports, could dent India's GDP growth by 30 basis points in the current fiscal, but the higher duty is unlikely to significantly affect India's domestic demand-driven economy, Barclays said on Thursday.

If the 25 per cent tariff, announced by US President Donald Trump on Wednesday, is implemented from August 1, the effective average US import tariff on Indian goods will rise to 20.6 per cent in trade-weighted terms, as per Barclays estimates.

This is sharply higher than both the pre 'liberation day' tariff rate of 2.7 per cent and the 90-day pause tariff rate of 11.6 per cent. In contrast, India's import tariff on US goods is lower, at 11.6 per cent in trade-weighted terms.

Barclays said that given the relatively closed nature of the Indian economy, wherein domestic demand is the mainstay of growth. "We do not see this 25 per cent tariff threat impacting GDP growth meaningfully, pegging the likely impact at 30 bp. We expect final tariffs on India to settle in lower than the announced 25 per cent, as India and the US continue with trade deal talks," it said.

Indian economy is projected to grow at 6.5 per cent by the Reserve Bank-- same as last fiscal, while the International Monetary Fund (IMF) and Asian Development Bank (ADB) peg growth at 6.4 per cent and 6.5 per cent respectively.

At 25 per cent, tariffs on India are higher than EM Asian peers, but Barclays expect final tariffs to settle lower as trade deal talks progress.

Echoing similar views, Moody's Analytics Associate Economist Aditi Raman said while the US is India's largest trade partner, the Indian economy is relatively more domestically oriented than most of the region and relies far less on trade.

"Pharmaceuticals, gems, and textiles are key sectors that are likely to be hit. A point of contention is market access to the key agricultural and dairy sector, which India has historically been reluctant to grant," Raman said.

Barclays further said, “India is already diversifying its sources of oil supply. Should the additional 'penalty' threat materialise, we expect Indian refiners to pivot towards alternate suppliers, especially as the discount on imports of Russian oil has already narrowed.”

To diversify its export base, the Indian administration is showcasing a renewed zeal to ink free-trade agreements with other countries and regions.

"Amid heightened global trade policy uncertainty, having a pipeline of such bilateral trade agreements is a prudent policy choice," Barclays said.

India has recently inked an FTA with the US and the EFTA bloc, and it is negotiating with a number of countries, including the European Union, Oman and New Zealand.

The US is India's largest trading partner, accounting for 18 per cent of India's total merchandise exports in 2024. India's USD 80 billion merchandise exports to the US are distributed in sectors which also form India's overall major exports.

India's top exports to the US, electrical machinery (USD 12 billion, including smartphones), and gems and jewellery (USD 9 billion) now face tariff increases of just over 24 percentage points, compared with levels before April 2. On the rupee, Barclays said that although more pain is expected in the near term, the drop in INR vis-à-vis USD still looks overdone.

The INR, which had already been under pressure over recent weeks, fell sharply on the tariff news, hitting a low weaker than 87.50 versus USD.

"We think the rupee is looking oversold in the short term. Clearly, USDINR has bounced more than anticipated, but we think the February high of just under 88.0 remains a strong resistance level," Barclays said.