Donald Trump's Tariff: Major Jolt For India's Exports Starting April 2?

US Tariff News: US President Donald Trump is set to announce reciprocal tariffs later today. However, a report by Motilal Oswal suggests that its impact on India will be minimal.

"We believe that the impact of reciprocal tariffs (assuming full product-level reciprocity) on India will be limited on a national basis," a report by Motilal Oswal said.  

While the government anticipates a minimal national-level impact from the Reciprocal Tariff Plan, an analysis of trade data suggests certain sectors may experience significant challenges.

These industries, which form a vital part of India's export portfolio, could face notable disruptions in production, supply chains, and employment.

India’s Trade Dynamics with the US

According to Motilal Oswal's report, India's trade surplus with the US stood at USD 37 billion in CY24, accounting for 1.0% of India’s GDP , compared to USD 19 billion (0.9% of GDP) in CY15. This growth was largely driven by exports in electronics, pharmaceuticals, textiles, and gems & jewellery, underpinned by the Production-Linked Incentive (PLI) scheme introduced in 2020.

Exports to the US reached USD 81 billion, or 18% of India’s total exports in CY24, up from 13% in CY14 and 6% in CY06. Meanwhile, imports from the US amounted to USD 44 billion, contributing to 6% of India’s total imports, which has remained relatively stable since CY14.

India imposes a weighted average tariff of 12% on imports from the US, compared to the 3% tariffs imposed by the US on Indian imports, resulting in a tariff differential of 9%.

The Reciprocal Tariff Plan is expected to raise US tariff rates by 12 percentage points, potentially impacting specific export-driven industries.

Vulnerable Sectors

Sectors heavily reliant on US demand and exposed to tariff hikes include Pharmaceuticals (11% of India’s total exports to the US), Gems & Jewelry (11.5% of exports), Electrical Machinery (15.6%), Machinery for Nuclear Reactors (8.1%), articles of Iron and Steel, and Machinery for Nuclear Reactors (16.5% of the total exports to the US and 0.3% of India’s GDP, the report said.

Seafood: A major export product to the US

These sectors collectively contributed USD 42.2 billion, or 52% of India’s total exports to the US in CY24, equating to 1.1% of India’s GDP. With the tariff differential and an estimated elasticity of -0.5 (implying a 1% increase in tariffs reduces exports by 0.5%), this could result in a reduction of USD 3.6 billion in India’s exports to the US (approximately 4.5% decline in exports to the US and 0.1% of India’s GDP), Motilal Oswal report said.

Less Vulnerable Sectors

Sectors like agriculture, energy commodities (30.7% of India’s imports from the US), and metals, which either have lower export values or trade deficits with the US, are less susceptible to reciprocal tariffs. These categories are also less exposed to significant disruptions since higher tariffs would primarily harm the US more than India in these areas.

"India’s exports in the six most vulnerable sectors amount to only 1.1% of India’s GDP. With a tariff differential of 9% and assuming that the elasticity of India’s exports to the US with respect to tariffs is -0.5 (implying a 1% rise in the tariff rate would reduce India’s exports to the US by 0.5%), there will be a loss of $3.6 bn in exports to the US, which is only 0.1% of India’s GDP (-0.5*9, 4.5% fall in India’s exports to the US)," the report added.