Will Donald Trump’s Tariffs Shatter Indian Economy?

The US has implemented a significant tariff hike, raising its effective tariff rate from approximately 2% to over 23%. India is now subject to a 26% tariff, while China faces an even harsher 54%. This drastic increase has sparked concerns about a possible global recession, higher financial risk premia, and disinflationary pressures on emerging markets (EM), including India.

A New Phase in the Trade War
As per a report by Emkay describes this as a "pivotal turning point for EM assets in the coming months," with heightened sentiment risks and capital outflows. The potential for de-escalation exists, but the severity of the move signals a tougher stance from the US.

India’s Growth and Inflation Under Pressure
India's economy, though relatively less dependent on US exports than other Asian peers, will not be immune to these trade shocks. India’s exports to the US account for approximately 2% of GDP . According to Emkay’s analysis, the 26% tariff could lead to a decline in India’s US exports by $30-33 billion, equivalent to 0.8-0.9% of GDP.

While it is too soon to formally revise growth estimates, risks to India’s FY26 GDP growth target of 6.5% are now tilted to the downside. Lower global commodity prices and excess supply from China could create a disinflationary impulse for Indian industries.

India’s Top-15 Export Items to the US (FY24)

 

India Better Positioned Than Asian Peers but Faces Challenges
Compared to Asian counterparts, India is relatively less exposed to the US tariff hike. However, it is unlikely to remain decoupled from a broader cyclical downturn. China’s response to the trade war could particularly impact India through excess industrial capacity and aggressive dumping in the global market.

Some industries might find pockets of opportunity if India can swiftly capitalize on shifts in global supply chains. According to Emkay, the least exposed sectors include Textiles & Apparel, Pharma, and Footwear, whereas Auto and Jewelry are likely to suffer the most.

Read More

 Donald Trump’s Tariff Tremours Spook Markets, Top Gainers And Losers On Nifty And Sensex Today

Mazagon Dock Shipbuilders Stake Sale: How To Apply For Rs 5000 Crore OFS? Floor Price and Other Details



Global Implications: Recession Fears Rise
The tariff escalation is expected to heighten global uncertainty, increasing the probability of a US-led recession. The trade war’s consequences could lead to lower corporate profit margins in the US and higher inflation by up to 1.5 percentage points. With the possibility of stagflation emerging, financial market volatility is expected to surge.

Key Global Trends to Watch:
The US Dollar ‘Smile’ Comeback – Given its anti-cyclical nature, the USD is expected to strengthen amid economic uncertainty.
Currency Wars – China, as the most affected country, could aggressively use the CNY as a policy tool to maintain competitiveness.
Rising Risk Premia for EM Assets – Emerging markets are likely to see increased capital flight and heightened financial stress.
Higher Market Volatility – Equities and interest rates are expected to experience sharp fluctuations due to heightened global trade tensions.

Industry-Specific Impact in India

What’s Next?
With US tariffs escalating and China likely to retaliate, global markets are set for an uncertain ride. Indian policymakers may need to take protective measures against increased Chinese dumping and navigate trade negotiations with key partners. The Reserve Bank of India ( RBI ) and other EM central banks will have to balance easing bias with financial stability concerns as risk aversion grows.

The long-term impact of this trade war remains to be seen, but in the short term, markets, investors, and businesses should brace for heightened volatility and strategic shifts in global trade flows.