US President Donald Trump announced sweeping reciprocal tariffs on its trading partners on 2 April, a move aimed at reducing the country’s dependency on foreign products amid its ballooning trade deficit. Trump announced a 26% tariff on imports from India, effective 9 April.
Companies in sectors such as apparels & textiles and chemicals, which have a higher exposure to the US, may bear the brunt of the new tariff, given the risk of muted near-term order flows and pricing pressures amid the disruption in global supply chains. That said, a silver lining is that the direct impact of this development on India is likely to be limited.
“At the first glance, the 26% tariffs imposed on India seem rather high, higher than what India levies on most US items. However, two of India’s high-ticket exports — IT services and pharmaceuticals, are untouched by this announcement (the latter being in exempted list),” Bernstein said in a report dated 3 April.
Also, other Asian countries have been levied with relatively higher tariffs, so India may get a competitive edge, even if it’s limited. (See chart)
“Items like apparels and auto parts will see major tariff raises, but India seems protected from a competitive point of view, as tariffs on several south Asian economies that compete with India on these items are even higher,” added Bernstein.
Tariff swap?
The reciprocal tariffs are certainly a sentiment dampener, but the expectations are that trading partners including India would negotiate with the US to ease some of them. In this backdrop, a key event to watch out for is the India-US Bilateral Trade Agreement, which is likely to be finalised in the months ahead.
“A likely outcome is a tariff swap: the US could roll back the new 26% tariff in return for India cutting duties on autos (from 70% to ~25%, especially for EVs), agri products (almonds, apples), and alcohol (wines/whiskey from 150%),” Prabhudas Lilladher said in a note dated 3 April. “In exchange, India would seek removal of US tariffs, restoration of GSP (General System of Preferences) benefits, and better market access. An early harvest deal may focus on sectors like defence, where large Indian procurements could serve as goodwill gestures to unlock progress on trade irritants.”
Even though India is a more domestically driven economy, it is not fully immune to the indirect/spillover impact of rising tensions in the global trade scenario. Fears of a global economic recession have resurfaced and the impact on inflation trends is crucial.
According to Morgan Stanley, the impact on India will be more pronounced indirectly, through weaker corporate confidence, which will dent risk appetite and further defer the capital expenditure cycle. The research house cautions of a downside risk of 30-60 basis points to its GDP growth estimate of 6.5% for FY26.
Among sectors, Indian IT firms may feel the heat as clients in the US and Europe could defer their technology-related spending on fears of an economic slowdown, thus clouding the sector’s revenue growth trajectory in FY26.
For other Asian countries such as Taiwan, Thailand, Malaysia and Korea, which are more export-oriented economies, Trump’s announcement could derail the export growth momentum. Additionally, the reciprocal tariffs could adversely impact Asian foreign exchange rates and weigh on interest rate decisions of Asian central banks.
A key concern is that the steep tariff rates could exert pressure for faster monetary policy easing as central banks strive to protect their economies from external demand shocks.