Donald Trump’s entry into the Oval Office and his trade policies, particularly the imposition of tariffs on imports, have disrupted global economic stability.
After imposing tariffs on steel and aluminum imports, Trump delivered another shock to global economies by announcing a 25% tariff on foreign-made automobiles and auto parts.
As April 2 approaches—a date Trump has dubbed “Liberation Day”—when he is set to unveil what appears to be his most significant trade policy yet, reciprocal tariffs, economists, trade experts, and market watchers are busy assessing his likely moves and their potential impact on the global economy.
Invezz spoke with Dr. Devendra Pant, chief economist at India Ratings and Research, to gain insights into what to expect.
Pant noted that while India’s relatively low dependence on external demand provides some insulation from global disruptions, a contraction of exports is likely to impact the manufacturing sector.
He estimates that if the US imposes reciprocal tariffs on India to eliminate the tariff differential, India could see a loss of $3–$5 billion in exports, translating to a 10-basis-point reduction in GDP growth.
“While there will be an impact from US tariff hikes, it is unlikely to be severe,” Pant said.
Edited excerpts:
Dr Devendra Pant, India Ratings and Research
How insulated is India from Trump tariffs?
Invezz: Fitch says India is somewhat insulated from US trade policies due to its low reliance on external demand. RBI too has said that strong domestic demand will sustain economic growth. Your thoughts?
There are different ways to look at this. It is well known that India is an internal demand story rather than an external one, like China and some other countries with export-led growth.
Why it is important is because if we look at the period from 2000 to 2008—whether using GDP data from the old base or the new base—the years from 2003 to 2008 were the golden period for India.
During that time, economic growth was very high. If we analyze that period, India’s exports in dollar terms, which we often use as a proxy for export volume, grew at an average of around 25%.
Right now, we are witnessing much weaker export growth, likely in the low or mid-single digits. This discussion specifically pertains to goods exports, not services.
Because of that, we have seen that our manufacturing Gross Value Added (GVA) growth was close to 9%, so that is the importance of external demand.
But yes, if your external demand, or exports as a percentage of GDP, is not a very high proportion, then what happens is that even though there were adverse developments in the global world, the economy is insulated to a certain extent.
However, another critical data point to consider is India’s trade surplus with the US.
While India has a large overall trade deficit, it maintains a trade surplus with the US, one of the few economies with which India has a trade surplus.
For example, in FY24, India’s mercantile trade surplus with the US stood at $35.32 billion.
In the first eight months of the fiscal year, this surplus had declined to $23.26 billion.
But yes, if you look at the economy as a whole, because trade is not a big proportion of India’s GDP, adverse development in the global demand will have a relatively lower impact on the Indian economy compared to those economies, that have a higher share of trade in their GDP.
Having said that, if that contracts, then you will see the impact on the manufacturing sector. You will see a manufacturing growth which we are struggling to uplift.
And, if the manufacturing slows down, your overall economy will slow down, and most of the people who are dependent on these sectors as a source of wages, salaries will get impacted.
US raising tariffs could cost India $3-$5 bn of exports
Regarding tariffs, our estimates indicate that trade effects depend on how deeply one examines tariff classifications under the Harmonized System (HS) code.
The broader the classification, the clearer the aggregate trends become.
For instance, in Indo-US trade, there exists a tariff differential—India imposes higher tariffs on US goods than the US does on Indian goods.
The weighted average tariff differential is of the order of 7%.
Historically, India’s weighted average tariff on US goods exceeded 20% in 2000, but by 2008, it had fallen below 10%.
As of now, the average tariff differential between what the US imposes on Indian goods versus what India imposes on US goods stands at 7.1 percentage points.
There are certain products where the tariff differential is much higher.
Take, for example, bourbon whisky. India traditionally imposed a 150% tariff on imported whisky.
Recently, there were reports that this rate was reduced to 100%.
However, the total volume of bourbon whisky imports into India is still relatively low.
The Scotch whisky remains a dominant player, with many Indian consumers preferring red label and black label variants.
So, while tariff reductions on whisky imports might have some impact, the overall effect on trade will depend on broader economic trends and sector-specific demand patterns.
We conducted an analysis at the two-digit level, examining 97 HS4 categories, and concluded that if the tariff differential is zero and the US raises tariffs according to the World Bank classification—specifically, as per the World Integrated Trade Solutions Database—the impact on Indian exports could be around $3-5 billion.
This may translate to approximately 10 basis points (bps) of GDP growth.
India’s auto component exports to the US
One critical factor to consider, like, if you take the example of auto components-while India’s auto component exports to the US are significant, they are not overwhelmingly large.
Some Indian manufacturers supply components to major US automakers like GM and Ford.
The question is whether these original equipment manufacturers (OEMs) will be able to find new suppliers at the same cost by April 2.
For example, if Indian suppliers provide a component at $10 per piece, it is unlikely that GM or other automakers will immediately find another supplier offering the same product at the same price by April 2.
Now, the one thing to be factored in is, suppose after this tariff war and everything, the US hikes the tariff.
And that’s 7.1%, which is India’s tariff differential, and when the landed price of those goods in the US goes up, what is going to happen to US inflation?
If you follow trade negotiations, some of the items are non-negotiable.
Say, for example, when I think 20 years ago, India walked out of the WTO simply because subsidies to the farmers and food subsidies to the consumers are non-negotiable.
India walked out of RCEP mainly because of issues related to dairy products. So, these trade negotiations are a long-drawn-out process and a very slow process.
There will be some give and take. Each economy will try to maximise its gains. As we say in game theory, it’s a two-person, zero-sum game.
If one side loses, the other gains the same amount, leading to a highly strategic negotiation process.
It remains uncertain whether these tariff measures will be fully implemented, especially given the retaliatory actions from key US trading partners like Canada and Mexico.
For instance, Canada alone exports around $45 billion worth of automobiles to the US.
Given such high stakes, the current developments may be more about bringing stakeholders to the negotiating table rather than enforcing sweeping tariff measures.
But it is unlikely that the kind of fallout that people were expecting initially, say for example, just after Trump won the presidency, I think both the industry as well as the people are now more assured that there will be an impact, but it is unlikely to be very significant.
Vulnerable sectors
Certain sectors, however, may face notable challenges.
Based on tariff differentials and India’s share in reciprocal tariffs, some of the most vulnerable sectors include vehicle parts, where India imposes a 24.2% higher tariff on US imports, iron and steel (16.5% differential), precious and semi-precious stones (10%), pharmaceuticals (10%), electrical machinery and equipment (9%), apparel and clothing accessories (9%), mineral fuels (8%), and organic chemicals (6%).
These commodities account for nearly two-thirds of India’s total exports to the US, making them particularly susceptible to tariff changes.
Now, there is another kind of impact that not many people are talking about.
So, this vulnerability is based on the proportion of commodities that India exports to the US. But what about certain commodities where the total amount of exports may not be very significant, but the proportion of exports to the US in India’s global export of these commodities?
Then you find there are some sectors where there could be some vulnerability based on the destination.
For instance, products like pork skin and artificial pork, as well as preparations of meat or fish, could be impacted despite their lower overall export values.
Pharmaceuticals are also a major concern, as nearly 30% of India’s total pharmaceutical exports in the first eight months of FY25 were directed to the US.
Similarly, textile-related exports, though accounting for only 7.5-8% of India’s total exports, could experience some pressure.
In conclusion, while there will be an impact from US tariff hikes, it is unlikely to be severe.
The estimated effect on GDP growth is around 10 bps, while the overall impact on Indian exports to the US could be in the range of $3-5 billion.
On possibility of dumping and “China plus one”
Invezz: US-China relations are also at the center of these trade policies that he is embarking on. So, there’s always a fear that when duties are imposed against China, they will take the route of Southeast Asian countries and dump their goods in India. Do you foresee that happening? Or, on the flip side, could this also be an opportunity for companies looking to diversify away from China?
“China plus one” has been in the news, but barring a few sectors, it hasn’t seen much traction on the ground.
If you look at the FDI outflow from China, it has largely gone to Bangladesh, Vietnam, and some African countries, bypassing India.
The notable exception is Apple manufacturing, which has come into India through Foxconn.
While we are exporting mobile handsets now, Samsung set up a big factory in Noida three to four years ago, but whether that truly fits into the “China plus one” strategy is debatable.
Even if we count that, there hasn’t been much that India has been able to gain from “China plus one.”
As far as dumping is concerned, yes, there are concerns.
In the last couple of days, there has been news that India is considering increasing tariffs on steel imports from China to prevent dumping by other nations that are unable to export elsewhere.
If needed, there could also be non-tariff barriers. Under non-tariff barriers, quotas can be imposed to restrict the quantity of steel imports from a specific country.
Should India use this opportunity to insulate itself less?
Invezz: There is also a section of economic experts who view this trade tension as an opportunity for India to insulate itself less. Some argue that because of the high tariff differential between the US and India, there might be some complacency among Indian manufacturers. Could this be the time for India to take a bold step and truly ignite those “animal spirits” by lowering tariffs?
We have to look at this in two ways. First, we need to protect domestic industries because India’s industrial base and development are still weak.
Gone are the days of 1991 when economic reforms began, and the peak average tariff rates were significantly higher before being gradually reduced.
Today, if anyone suggests lowering tariffs on dairy products, my response would be that it’s highly unlikely.
India is the world’s largest milk producer, but per capita milk consumption remains relatively low.
If import duties on powdered milk are reduced and cheaper milk powder starts coming in from countries with a large surplus at Rs. 40 per kg, will Indian producers be able to compete? No.
Milk is the only regular source of income for many farmers, who receive payments on a weekly or fortnightly basis.
Unlike wheat or rice farmers, who get paid only after three to four months, dairy farmers rely on a consistent cash flow.
If cheaper imports flood the market, local milk procurement will suffer, impacting farmers’ livelihoods.
So, while it may sound good in theory to “unleash animal spirits” and lower tariffs, the government has to balance both consumer and producer interests.
It’s not just about protecting consumers but also ensuring the survival of domestic industries.
Of course, there has been some progress. Since 1991, India has significantly reduced tariffs on many goods.
The government will always conduct a cost-benefit analysis before making such decisions.
Trade policy is always about give and take.
Need sustained real wage growth in the economy to fuel consumption
Invezz: Now, apart from these tariff threats, there have been some other headwinds also like corporate earnings have not been great. There have been FPI outflows. What are the other headwinds that the economy is likely to face in this financial year, apart from these trade tensions?
What we are having a problem with, in 2019-20, the government reduced the corporate tax, right? The expectation was that corporate investment would start.
Now, that coincided with growth slowing down. So, everybody looks at COVID, but pre-COVID, the growth was slowing down even in FY20.
And post that, corporate investment or private sector investment hasn’t picked up.
There was some inching up in FY23. In FY22, we saw some increase, but that was just recovering from COVID.
So in FY23, there was some movement, but in FY24, we haven’t seen strong private sector investment in the economy.
And why is it not happening? It is not happening because the consumption demand is still not that strong or stable.
You can have three Indias—one is the upper end, one is the middle class, and one is the lower end.
Now, what is happening is that for the goods and services consumed by the upper end, there is hardly any impact.
But for those consumed by the lower end, there was an issue.
If we look at wage growth, we shouldn’t focus on nominal growth; we should look at real growth.
The real wage growth for the non-BFSI sector has declined from the low teens to somewhere in the low to mid-single digits.
Rural wage growth, particularly harvesting wages, saw negative real wage growth, though it has turned positive in the last couple of quarters.
Until there is sustained real wage growth in the economy—not just nominal wage growth—stability in consumption demand will always be an issue. And until that happens, it is unlikely that we will see sustained GDP growth.
We keep hovering around 6.5% growth, but if we aim higher, if we have big aspirations, there has to be strong wage growth.
That will drive consumption, and consumption will then lead to investment growth.
The post Interview: US tariffs could cost India $3-$5 bn worth of exports and a 10 bps hit to GDP growth, says Dr Devendra Pant, India Ratings and Research appeared first on Invezz
