Impact of Tariffs on India’s Growth Rate

• U.S. imposes 25% reciprocal tariffs on India’s exports from August 7 and an additional 25% penal levy due to continued oil imports from Russia from August 29.

• These measures could weaken India’s merchandise trade surplus with the U.S.

Impact of Reciprocal Tariffs

• Immediate impact on trade balance.

• Tariffs could adversely impact India’s exports to the U.S.

• The overall trade deficit widens by about 0.56 % of GDP to 7.84%, resulting in a drop in real GDP growth by about 0.6% to 5.9% from 6.5%.

• The Current Account Deficit (CAD) is estimated to increase from 0.6% to 1.15% due to the U.S.’s reciprocal tariffs.

Caveats

• Estimates are subject to factors like India’s recent economic and trade agreement with the UK, negotiations with the European Union, and effects of tariff increases on other countries.

• The penalty threat could have further implications on the CAD, the exchange rate, and domestic inflation.

Mitigation Strategies

• India has the space to negotiate with the U.S., diversify the export market, and consider reducing its own tariffs on imports.