Why reciprocal tariffs may lead to spike in US consumer price levels, hit India’s GDP growth: What experts say

As the direct impact on India will be less severe as goods exports to the US are at 2.1 per cent of GDP and 1.7 per cent of GDP (excluding energy and pharma which are exempt from tariff hikes), a slowdown in US growth and weak global trade momentum will impact external demand, economists said. “We expect the impact to be more pronounced through the indirect channel of weaker corporate confidence, which will dent the risk appetite and further defer the capex cycle. As such, we see downside risk of 30-60 bps to our growth estimate of 6.5 per cent for FY26 estimate,” Morgan Stanley’s chief India economist Upasana Chachra and economist Bani Gambhir said in a note.

Thus, the proposed bilateral trade agreement between India and the US will be crucial in mitigating the impact of the reciprocal tariffs. “The impending trade deal with the US remains key to monitor, in our view, the implementation of which by the fall of 2025 could help reduce the downside risk from the direct impact of higher tariffs,” the Morgan Stanley report said.

Since the US has remained import dependent for many years, it will take time for it to substitute domestic production for imported goods and in the meanwhile, the cost of imports of many consumption items as well as many intermediate products would go up significantly, DK Srivastava, Chief Policy Advisor, EY India. “Retaliation by many countries may mean a fall in US exports and no tangible improvement in its trade imbalance. This global slowdown may have a positive impact on India due to a lowering of crude oil prices. However, there would be an adverse impact on India’s export growth and therefore GDP growth which may come down to 6 per cent as against the expectation of 6.5 per cent in 2025-26, if India does not respond with suitable policies to neutralise this adverse impact,” Srivastava said.

Tariffs may hit India growth

US tariff rate at historic high

Among other countries, the trade war with China will escalate with the imposition of 34 per cent reciprocal tariffs on top of the existing 20 per cent tariffs. “The risk of second-order effects (re-routing of exports, dumping in other markets or currency devaluation) is the greatest from China. Reciprocal tariffs on Canada and Mexico, which currently face 25 per cent tariffs, will not come into effect immediately,” the Axis Bank report stated.

For the US, an increase in the price level by 1.3 per cent in the short run will be equivalent to an average consumer loss of $2,100 per household in 2024 dollar terms, as per the report by Yale Budget Lab. Annual losses for households at the bottom of the income distribution are estimated to be $980 under the April 2 policy alone, it said.

With the April 2 action, the effective US tariff rate implies an increase of 11.5 percentage points — the highest since 1938. The average effective US tariff rate after incorporating all 2025 tariffs is now 22.5 per cent, the highest since 1909, Yale Budget Lab said.

Incorporating the impact from all 2025 tariffs, the price level in the US is estimated to rise by 2.3 per cent in the short-run, implying an average per household consumer loss of $3,800 and annual losses of $1,700 for households at the bottom of the income distribution.

About the impact on the size of the US economy, Yale Budget Lab said US real GDP growth is seen -0.5 percentage points lower in calendar year 2025 and -0.1 percentage points lower in calendar year 2026. “After 2026, the level of GDP begins to recover modestly as production and supply chains reoptimize. But in the long-run, US output is still -0.4 per cent lower from the April 2 announcement. That’s the equivalent of the US economy being permanently smaller by $100 billion annually in 2024 dollars,” it said. Accounting for all the 2025 US tariffs and retaliation implemented to date, real GDP growth is seen -0.9 percentage points lower for the US in calendar year 2025 and -0.1 percentage points lower in 2026, while the level of real GDP is likely to be persistently -0.6 per cent smaller in the long run, equivalent of $160 billion annually, it said.