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As the India-US negotiations for a trade deal are now on ice, analysts predict that the tariff impact on India’s growth trajectory and on the country’s corporate sector might be overstated, but risk of second-order effects from existing tariffs could be rising. A US-India trade deal, if secured, would lower these risks.
A senior government official said that given the relatively low weightage of US exports in India’s GDP, at under 2 per cent, the impact on the economy is perhaps overblown. Also, some key exports from India are still out of the tariff impact, including pharmaceuticals shipments. It remains to be seen if that status continues going forward, given the hard position taken by White House Trade Advisor Peter Navarro, who, in a sharply-worded opinion piece in The Financial Times wrote that New Delhi was “now cozying up to both Russia and China” and that “if India wants to be treated as a strategic partner of the US, it needs to start acting like one”.
The government official quoted above indicated that there are no talks with the US, not even any backchannel negotiations to dial down the tensions. The American negotiators’ scheduled visit to India during the second half of August has effectively been put off indefinitely.
The US is India’s largest export market. According to rating agency Fitch, there is only “a minimal direct tariff impact” on Indian IT service companies and domestically focused sectors such as upstream and downstream oil and gas, cement and building materials, engineering and construction, telecoms, and utilities. If US tariffs are, however, sustained at levels significantly higher than in other Asian markets, there could be moderate downside risks to India’s growth projection of 6.5 per cent in FY26, it said. This, according to Fitch, would weigh on the operating performance of more Indian companies and India’s corporates could be affected if US tariffs divert supplies to other markets, which could present downside risks to the domestic price assumptions made by the rating agency for some products, such as steel and chemicals.
The problem, though, is that while the tariff impact on Indian companies might be limited, the employment intensiveness of India’s export sectors that are focused on the US market, including sectors such as textiles and garments, leather, gems and jewellery, engineering goods and electronics, is disproportionately high, and that is a worry for policymakers. Much of these sectors are dominated by small and medium enterprises and their labour intensiveness is typically higher than corporates while their ability to cope with an external shock of this kind is way lower than big companies.
Another senior government official said the impact of reforms to India’s foreign trade sectors and a broader reforms push, if done well, could improve overall growth prospects. The Finance Ministry Monday notified the elimination of 11 per cent duty on cotton imports with immediate effect amid widespread fears of job losses in the textile sector due to the US tariffs.
The government said that the elimination of import duty on cotton as well as Agriculture Infrastructure and Development Cess (AIDC) “is necessary in the public interest” and that notification will come “into force with effect from August 19, and shall remain in force up to and inclusive of September 30”. The textile sector is expected to be hardest hit sector due to steep US tariffs as American is a key market for Indian ready-made garment exports; its share in India’s total garment exports in 2024 stood at 33 per cent, as per the Apparel Export Promotion Council. Also, a consumption push from the proposed GST cuts, if executed as planned, could also help.
According to estimates compiled by New Delhi-based GTRI, labour-intensive sectors contributed over $14.3 billion to India’s exports to the US in FY25, including garments ($5.33 billion), textiles and carpets ($2.38 billion), made-ups and worn clothing ($2.95 billion), leather ($795 million), footwear ($461 million), ceramics and stoneware ($1.55 billion), and wood and paper articles ($823 million). These sectors are dominated by small and medium enterprises and are major employment generators in Indian states such as Uttar Pradesh, Tamil Nadu, West Bengal and Gujarat.
The breakdown in trade talks with the US assumes significance as President Donald Trump has announced 50 per cent tariffs on Indian products — the highest on any country globally. While 25 per cent US tariffs on India have already kicked in, government officials have said the levy of another 25 per cent could come into effect on August 27.
The India-US trade deal has been stuck over India’s long-standing stance of protecting Indian farmers in every trade agreement New Delhi has entered into. However, the US under Trump is not only prioritising market access for its agricultural products but also renegotiating deals to get market access for it’s agri products.
Fitch Ratings said that while India-based corporates generally have low direct exposure to US tariffs, sectors that are currently unaffected, including pharmaceuticals, could be hit by further US tariff announcements. The risk of second-order effects from existing tariffs is also rising, which would be mitigated by a US-India trade deal, if secured.
India’s direct automotive exports to the US, including parts, are limited, it said, adding that America is a key export destination for Indian pharmaceutical companies. Fitch said it currently assumes “a minimal direct tariff impact” on Indian IT service companies and domestically focused sectors such as upstream and downstream oil and gas, cement and building materials, engineering and construction, telecoms, and utilities.
“However, if US tariffs are sustained at levels significantly higher than in other Asian markets, we see moderate downside risks to our projection that the economy will grow by 6.5 per cent in FY26. This would weigh on the operating performance of more Indian companies. India’s corporates could also be affected if US tariffs divert supply to other markets, including India, as this could present downside risks to our domestic price assumptions for some products, such as steel and chemicals,” it said.
