The Indian economy could end up growing up by less than 6 per cent in the current fiscal if US President Donald Trump’s surprise tariff of at least 25 per cent on Indian goods remains in place for the rest of the year, with most economists predicting a hit of 20-40 basis points (bps) to the growth rate.
According to ANZ economists Dhiraj Nim and Sanjay Mathur, if the US’ 25 per cent tariff on India remains in place for the remainder of 2025-26, “it could subtract 40 bps from GDP growth”, although the duo added that the impact could be lower as India’s rivals are also facing higher tariffs than before.
ANZ currently expects India’s GDP to expand by 6.1 per cent in the current fiscal, lower than the Reserve Bank of India’s (RBI) forecast of 6.5 per cent and the finance ministry’s 6.3-6.8 per cent projection range.
Late Wednesday, Trump said that starting August 1, Indian goods would face a 25 per cent tariff when being imported into the US as well as an additional but unspecified “penalty” for purchasing energy and defence equipment from Russia. In a post on social media platform Truth Social, Trump said India has “the most strenuous and obnoxious non-monetary Trade Barriers of any Country”. The Indian government, on its part, responded by saying that it’s studying the implications of Trump’s statement and remains committed to arriving at a “fair, balanced and mutually beneficial” trade agreement.
Early Thursday, Trump said on Truth Social that he didn’t “care what India does with Russia. They can take their dead economies down together, for all I care”.
Slowing growth
After clocking an unexpectedly high GDP growth rate of 7.4 per cent in the final quarter of 2024-25, the Indian economy is widely expected to have slowed down in April-June, with the RBI itself having predicted in June that growth would slow down to 6.5 per cent in the first quarter of 2025-26. The statistics ministry will release GDP data for April-June at the end of August.
Economists have widely been of the opinion that the RBI’s forecast of 6.5 per cent for 2025-26 is a tad optimistic, with the Indian central bank aggressively cutting interest rates over the last few minutes to support economic activity in the face of multi-year low inflation. Trump’s tariff shock, however, puts a spanner in the works.
“At these tariff rates, if the burden of higher tariffs is equally split between Indian producers and US consumers, it could directly shave off 0.3 ppt (percentage points) from India’s GDP growth,” HSBC economists Pranjul Bhandari and Aayushi Chaudhary, who currently forecast a growth rate of 6.3 per cent for 2025-26, said in a note on Thursday. “The penalty rate, if levied, would shave off further from growth, and there could be an indirect growth drag as well, led by lower capital inflows, investment, and suchlike,” they added.
One percentage point is equal to 100 bps.
A hit of 30 bps to this year’s growth rate was echoed by Barclays, while Nomura economists estimated a slightly lower impact of 20 bps from their current forecast of 6.2 per cent.
The RBI’s Monetary Policy Committee (MPC) is set to meet next week to decide on interest rates. So far in 2025, the rate-setting panel has reduced the policy repo rate by 100 bps to 5.5 per cent, although it signalled in June that it had little room left to support growth further. Since then, headline retail inflation – which is the RBI’s legally-mandated target – has slumped, coming in at just 2.1 per cent in June, only marginally higher than the lower bound of the central bank’s target range of 2-6 per cent. As such, markets are increasingly of the opinion that the MPC may be able to further cut interest rates in the coming months.
Export impact
To be sure, the US is India’s largest trade partner and was the destination of around 18 per cent of its goods exports. However, the Indian economy is “relatively more domestically oriented than most of the region and relies far less on trade”, Aditi Raman, Associate Economist at Moody’s Analytics, said.
According to Emkay Global Financial Services, India’s exports to the US could fall by $30 billion-$33 billion at tariff levels of above 25 per cent. This estimate does not account for any cross-country responses.
In 2024, total goods trade between India and the US stood at $129.2 billion. While the US’ exports to India in the last calendar year rose 3.4 per cent from 2023 to $41.8 billion, its imports from India increased by 4.5 per cent to $87.4 billion, resulting in a goods trade deficit of $45.7 billion. India primarily exports electronics, gems and jewellery, pharma products, machinery, textiles, and refined petroleum products to the US.
After clocking an unexpectedly high GDP growth rate of 7.4 per cent in the final quarter of 2024-25, the Indian economy is widely expected to have slowed down in April-June, with the RBI itself having predicted in June that growth would slow down to 6.5 per cent in the first quarter of 2025-26. (File photo/AP) 
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