After US President Donald Trump's higher-than-expected 50 per cent tariffs kicked in on India last week, due to its continued purchases of Russian oil and high import barriers, wealth managers discuss the impact on the economy and investment.

India’s exports to the US now face 50 per cent tariffs after the additional 25 per cent punitive tariff became effective last week. Although India’s exports to the US account for 2 per cent of its GDP growth, Sok Yin Yong, fixed income analyst Asia at Swiss private bank Julius Baer, highlighted that the US is still the country’s largest export market.

A planned visit (25 to 29 August) by the US delegation to India had been cancelled, delaying the next round of trade talks. In response, the government has announced consumption tax cuts and is considering other measures to cushion the tariff impact. The Reserve Bank of India (RBI) could ease further and step up on measures to aid growth. The timing of the implementation of the consumption tax cuts would be before Diwali (20 October), likely to take effect by late September, which could aid festive sales. The government is also considering financial support for exports to help ease the tariff impact and other possible measures such as lower interest loans and support for accessing new markets.

“Indian government bonds (IGB) saw a selloff amid fiscal worries in light of the planned tax cuts,” Yong continued. “The higher tariffs are estimated to affect 55 to 66 per cent of India’s exports to the US, including textiles, gems and jewellery, shrimp, carpets, and furniture. This is expected to threaten India’s export competitiveness against countries like China and Vietnam.”

Although India can negate the impact of the tariffs through fiscal stimulus, Andy Draycott, portfolio manager of the Indian Subcontinent Fund at UK-based Chikara Investments, believes that the lost opportunity of goods manufacturing will have bigger implications than the net $40 billion in jewellery, leather and shrimps. “Both India and the Trump administration are waiting to see who blinks first, but if neither do, then America will push India towards BRICS integration, and longer term significantly impact the relevance of the US dollar,” Draycott said. (BRICs includes Brazil, Russia, India, China, South Africa, Egypt, Ethiopia, Indonesia, Iran and the United Arab Emirates.) “If Brazil, Russia, India and China – representing 40 per cent of population and GDP – decide America is no longer a reliable partner, how long before they trade in yuan or rupees?”

The US is the largest export market for India at 87.4 billion in 2024, but accounts for only about 2 per cent of India’s GDP. “With some sectors exempted from US tariffs for now, including pharmaceuticals, energy products, certain electronics and semiconductors, S&P in a recent note said Indian exports exposed to US tariffs are expected to be lower at 1.2 per cent of GDP,” Yong added. 

At its August monetary policy meeting, the RBI retained its GDP growth forecast at 6.5 per cent, citing resilient domestic growth, although global uncertainties, geopolitical tensions, and financial market volatility pose risks to the growth outlook. The RBI likely sees it as too early to evaluate the impact of the US tariffs on the economy and wants more time to assess incoming data, developments, and external demand prospects.

Draycott believes that Trump still wants a deal. He wants Russian President Vladimir Putin to cease the war, and for India to open its borders; in the eventuality that he gets what he wants, Draycott suspects the tariffs will be dropped, but if neither is achieved, then ramifications for both the dollar and BRICs are likely to be long lasting.

Draycott thinks that Indian equity investors should be cautious about overestimating the risks posed by US tariffs alone. “The macro impact looks set to be relatively contained with Moody’s having predicted a drag of just 0.3 per cent on the Indian economy if 50 per cent tariffs were introduced. Even then, real GDP growth is still expected to come in at 6 per cent," he said. See more commentary here about the impact of tariffs on Asia and India.