India's Robust Domestic Demand Acts as Shield Against US Tariffs: BoB Chief Economist

India's strong reliance on domestic consumption is proving to be a critical buffer against the impact of recently imposed reciprocal tariffs, according to Madan Sabnavis, Chief Economist at Bank of Baroda (BoB). Sabnavis highlighted that India's non-export-oriented economic structure makes it more resilient to external shocks stemming from these new trade barriers.

During a webinar discussing the tariffs' impact on India, Sabnavis stated, "Since we are not an export-oriented economy, it is becoming advantageous for us because we are more dependent on domestic consumption." This emphasis on internal demand helps insulate the Indian economy from global trade disruptions.

The context for these concerns arose on Wednesday, when US President Donald Trump announced the imposition of 25% tariffs on Indian goods, along with an unspecified penalty. This came despite earlier hopes for an interim India-US trade deal that could have averted such elevated tariffs. Earlier, on April 2, 2025, President Trump had signed an executive order for reciprocal tariffs on various trade partners, with rates ranging from 10% to 50%.

While acknowledging the potential impact, BoB's base case scenario suggests that a 10% decline in exports could lower India's GDP by approximately 0.2%. However, the bank's existing GDP growth forecast of 6.4-6.6% for the current fiscal year already factors in this risk.

A key factor in India's resilience, as highlighted in the webinar presentation, is its export-to-GDP ratio standing at 21%, with services comprising a substantial 47% of total exports. This high share of services makes overall exports relatively insulated from goods-specific tariffs.

Regarding inflation, BoB does not expect the Consumer Price Index (CPI) to rise in the near term, though about 10% of the Wholesale Price Index (WPI) basket could be affected by imported inflation. This could lead to higher input costs and potentially impact profit margins for some industries. The current account deficit (CAD) is projected to remain below 1% of GDP.

While India's export reliance on the USA is significant at 19.8%, its import reliance is considerably lower at 6.3%. However, certain industries within India's export basket, such as electronic goods, marine products, readymade garments, gems and jewellery, chemicals, and poultry, might experience a "dent" due to the tariffs. Clarity on potential exemptions from these tariffs is still awaited, which could offer some relief, the BoB chief economist added.

Sabnavis reiterated that India's substantial dependence on service exports further cushions the economy in this volatile tariff environment, particularly as the tariffs are primarily imposed on goods.

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