The direct impact of reciprocal tariff hikes by the US may be manageable, but the indirect impact through uncertainty weighing on business confidence is more concerning, according to a Morgan Stanley report released on Thursday. Despite this, domestic policy will likely continue to support growth, with additional measures taken if downside risks emerge.
Prime Minister Narendra Modi is currently on a scheduled visit to the US to meet President Donald Trump. The meeting’s outcome is expected to include increased imports of energy and defense equipment from the US and attempts at a mini-trade deal, which could lower tariff rates on key segments for imports from the US. However, under the WTO, bilateral tariff reductions are not possible, the report states.
President Trump has suggested imposing reciprocal tariffs that could impact India, given India’s higher tariff rates compared to the US. India’s weighted average tariff rate on US imports is 8.5%, adjusted for recent budget reductions, compared to the US’s 3% tariff rate.
Key segments that could come under pressure due to reciprocal tariff hikes include electrical machinery, gems and jewelry, pharmaceuticals, fuels, textiles, iron and steel, autos, and chemicals. The US accounts for 17.7% of India’s goods exports, with India holding a trade surplus of $45.7 billion with the US. However, India’s trade surplus with the US is lower compared to other Asian countries such as China, Japan, Thailand, and South Korea.
The report identifies three areas of concern. First, an increase in weighted average tariff rates by approximately 6 percentage points would likely be manageable. However, certain segments may face much higher tariffs, considering India’s high tariffs on products like motorcycles, which have a 30% tariff rate, reduced from 50% earlier.
Second, uncertainty from tariff policies could create an overhang on business confidence and potentially lower global growth. Third, the impact of uncertainty leading to risk aversion and a stronger US dollar could weigh on central banks’ ability to effectively ease domestic financial conditions.
India’s weighted average tariff rate on US imports is expected to decline by 1 percentage point, from 9.5% in 2022 to 8.5% in 2025, due to tariff reductions. The report highlights the importance of the outcome of PM Modi’s meeting with President Trump, US tariff-related policies, and trends in capital flows.
The US is a significant destination for India’s exports, with its share in overall exports rising from 15.8% in 2018 to 17.7% in 2024. Key commodities that India exports to the US include electrical machinery, gems and jewelry, pharmaceuticals, textiles, autos, iron and steel, and chemicals. On the other hand, India’s share of US overall imports remains small, increasing from 2.1% in 2017 to 2.7% in 2024, with a compound annual growth rate of 11.4% from 2017.
India runs a trade surplus with the US, amounting to $45 billion in 2024, making it the seventh-largest trade surplus among nations with the US. The US is also a crucial market for India’s services exports, accounting for 54% of India’s software service exports as of 2024, with computer services comprising the highest share at 27%, according to RBI data.
