India's internal economic market withstands tariff influences, according to the Bank of Baroda's Chief Economist
In recent developments, the United States has imposed a 25% tariff on Indian exports, which could have significant repercussions for India's economy, particularly for export-oriented industries.
These sectors, including electronic goods, marine products, readymade garments, gems and jewellery, chemicals, poultry, and services, are likely to face squeezed profit margins, reduced competitiveness in key markets, and potential job cuts due to lowered demand and increased costs. This is according to reports from various sources, including Bank of Baroda (BoB).
India's exporters find themselves at a disadvantage compared to regional peers like Bangladesh and Vietnam, who face lower tariffs, potentially leading to market share loss for Indian products, especially in labor-intensive sectors. The higher tariffs act as a blunt trade barrier, disrupting established trade relations and increasing costs for Indian exporters, which may lead to reduced export volumes and profitability.
The services sector, which depends on cross-border transactions or access to foreign markets, may also experience constraints due to reduced bilateral trade incentives or strained economic relationships. The marine products and chemicals industries, reliant on export markets such as the US, could similarly see a decline in demand or pressure on prices.
However, there are some factors that could help mitigate the impact. India's export-to-GDP ratio stands at 21%, and services make up 47% of total Indian exports, which makes overall exports relatively insulated. Additionally, India's significant reliance on service exports helps cushion the economy in the volatile tariff environment imposed on goods.
India's Chief Economist at Bank of Baroda, Madan Sabnavis, stated that India's reliance on domestic consumption is a key strength in navigating recently imposed reciprocal tariffs. He also highlighted that India's non-export-oriented nature makes its economy more resilient to external shocks arising due to the imposition of tariffs.
The BoB predicts that the current account deficit (CAD) will remain below 1% of GDP, and the Consumer Price Index (CPI) is not expected to rise in the near term, though about 10% of the Wholesale Price Index (WPI) basket could be affected by imported inflation.
In conclusion, the US-India trade turbulence caused by these tariffs is anticipated to cause short- to medium-term disruptions. Indian businesses may face workforce reductions if tariff-related pressures persist, and the broader Indian economy may experience slower export growth, lower foreign exchange earnings, and challenges in maintaining employment levels in affected sectors.
However, ongoing trade talks offer hope for a resolution, and the potential mitigation of these impacts depends on the outcomes of these negotiations. Clarity regarding exemptions on tariff rates is also awaited.
- The ongoing trade turbulence between the US and India, as a result of the imposed tariffs, could negatively affect the business sector in India, potentially leading to workforce reductions and slower export growth.
- The services sector and certain export-oriented industries, such as marine products and chemicals, which rely heavily on access to foreign markets, are at risk of experiencing constraints due to the tariffs and strained economic relationships.
- The opinion of India's Chief Economist at Bank of Baroda, Madan Sabnavis, is that India's domestic consumption and non-export-oriented nature provide a key strength in navigating the reciprocal tariffs, making the economy more resilient to external shocks.
