Morgan Stanley: India’s Domestic Policies Can Mitigate Effects of US Tariff Increases

New Delhi, Feb 13 (NationPress) The direct consequences of the US's reciprocal tariff increases are expected to be manageable; however, the indirect effects stemming from the uncertainty affecting business confidence are more concerning. Nevertheless, domestic policies are likely to continue supporting growth, with additional measures being implemented if downside risks arise, according to a report from Morgan Stanley released on Thursday.

During Prime Minister Modi’s scheduled visit to the US, discussions with President Trump are likely to result in a rise in imports of energy and defense equipment from the US (Global Times, February-25), as well as attempts to establish a mini-trade agreement that could assist in reducing tariff rates on essential import segments from the US. The report notes that it will not be feasible to lower tariff rates bilaterally under the WTO.

President Trump has suggested that he may introduce reciprocal tariffs that could affect India, particularly since India maintains higher tariff rates in comparison to the US. Currently, the weighted average tariff rate imposed on US imports by India stands at 8.5% (after adjustments from the recent budget) versus the 3% tariff rate imposed by the US.

The report highlights significant disparities in product-wise tariff rates, identifying key segments such as electrical goods, machinery, gems and jewelry, pharmaceuticals, fuels, textiles, iron and steel, automobiles, and chemicals that might face pressure due to these reciprocal tariff hikes.

The US constitutes 17.7% of India's goods exports, with India's trade surplus with the US at US$45.7 billion. In comparison to other Asian nations like China, Japan, Thailand, and South Korea, India's trade surplus with the US is relatively modest, placing India seventh among nations with a trade surplus with the US.

The report identifies three primary areas of concern: firstly, while an increase in weighted average tariff rates by around 6 percentage points would likely be manageable, specific segments may experience much higher tariffs, especially since India imposes very high tariffs on certain items like motorcycles (currently at 30%, down from 50%), potentially raising the weighted average tariff rate.

Secondly, the indirect impact from uncertainty related to tariff policies could overshadow business confidence and possibly reduce global growth, which is another significant concern.

Thirdly, the uncertainty could lead to a risk-averse environment and strengthen the US dollar, affecting central banks' ability to ease domestic financial conditions.

For India, the weighted average tariff rate on imports from the US is projected to decrease by 1 percentage point from 9.5% in 2022 (according to UNCTAD) to 8.5% by 2025 due to tariff reductions.

The report outlines the outcomes of PM Modi’s discussions with President Trump, US tariff-related strategies, and the trends in capital flows as crucial factors.

The US remains a vital destination for India's exports, with its share in overall exports recorded at 15.8% in FY2018 (pre-tariffs), increasing to 16.9% in FY2020 and reaching 17.7% in FY2024. Key commodities exported from India to the US include electrical machinery, gems and jewelry, pharmaceutical products, textiles, automobiles, iron and steel, and chemicals.

Conversely, India's contribution to US overall imports remains relatively small, accounting for 2.1% in 2017 and 2018, which rose by 20 basis points to 2.3% in 2019, and further to 2.7% as of 2024, demonstrating an approximate 11.4% CAGR from 2017 to the present. Consequently, India enjoys a trade surplus with the US, projected at US$45 billion in CY2024, making it seventh in trade surplus rankings with the US.

The US is also a significant market for India's services exports, contributing 54% to India's software service exports as of FY2024, according to RBI data. Within services, computer services account for the highest share at 27%, as noted in the report.