Reciprocal Tariffs: Supply re-orientation and investment impact key risks
Reciprocal tariffs, while having limited direct impact for India, create uncertainty and the risk of volatility in global markets.
Ind-Ra had earlier estimated that initial tariffs could shave off 10bp from Ind-Ra’s FY26 forecasted GDP of 6.6%, but there could now be further downside risks to these forecasts. (Image: Freepik)
While the direct impact of reciprocal tariffs on India is likely to be limited, the second order impact of excess supply into India due to the regional imbalances created by the US reciprocal tariffs could be seen on realisations in sectors such as chemicals, textile, steel and industrial machinery, according to India Ratings and Research (Ind-Ra).
Furthermore, the uncertainty on eventual tariffs and the slowing global growth are likely to keep corporates cautious on their investment plans even if there are short-term opportunities. Consequently, monetary and fiscal policies may have to be supportive of growth. Amid the macroeconomic turbulence, the impact on GDP growth may be different than Ind-Ra’s initial assessment of 10bp in FY26.
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The US has imposed a 26% reciprocal tariff on India. Ind-Ra expects a limited direct impact, despite the negative impact on global trade, given the tariff positioning of India relative to China and other South Asian export competing economies (Vietnam, Bangladesh, Indonesia) in sectors such as electronics, textile and specialty chemicals. The eventual benefits will remain dependent on overlapping products, approvals required from buyers and overall cost positioning in conjunction with reciprocal and retaliatory tariffs, if any. Pharmaceutical products, on the other hand, have been exempt from tariffs, but may become subject to duties pursuant to future actions. Were that to happen, pharma companies with a higher mix of US revenues will see an impact on their profitability.
“Reciprocal tariffs, while having limited direct impact for India, create uncertainty and the risk of volatility in global markets. The second order impact through supply chain re-orientations and approach towards private investments would be key elements to watch out,” says Rakesh Valecha, Senior Director, Core Analytical Group.
The Reserve Bank of India (RBI) has proactively eased the monetary conditions by initiating a policy rate cut in February 2025 along with the infusion of large primary liquidity (around INR 6 trillion by April) through the purchase of domestic bond assets and foreign assets in lieu of USD/INR buy/sell swaps. Ind-Ra opines that significant easing of monetary conditions will be immensely supportive of ease of financing by domestic industries amid the turbulent operating conditions.
While the growth momentum of most advanced and major developing economies had started moderating even before the initiation of tariff war, that of the US had been resilient, even after the sharp increase in interest rates. That being said, reciprocal tariffs are likely to act as major headwinds for the global growth momentum, along with heightened risk of rising inflationary pressures. The new tariff hikes are unprecedented in the post World War II era. In fact, they are even higher than the Smoot-Hawley Tariff Hikes of the 1930s, taking the US effective average tariff rates to the highest level in a century.
India Relatively Insulated from Direct Impact of Reciprocal Tariffs: The reciprocal tariff of 26% implemented on India is among the highest compared to other countries; however, India’s total exports and trade deficit with the US as of 2024 stood at USD87 billion and USD46 billion, respectively, which is significantly lower than that for other large trading partners of the US such as China, Mexico and Canada. Within the export basket, the US is still a significant proportion of exports for certain products namely electrical equipment, textiles, and pharma. While India is a smaller trade partner for the US than lower tariff countries such as Ireland, Germany, and Japan, some manufacturers may look to India for rerouting goods to the US if the eventual cost of delivery provides a relative advantage over a period of time. Ind-Ra had earlier estimated that initial tariffs could shave off 10bp from Ind-Ra’s FY26 forecasted GDP of 6.6%, but there could now be further downside risks to these forecasts.
Second Order Impact of Reciprocal Tariffs is Key Monitorable: The US relies heavily on China for the import of electrical equipment, industrial machinery, and textiles, which together form 50% of US’s total imports from China. Given that India faces lower reciprocal tariffs than China and Vietnam, India may have a better position especially for finished product categories where it competes with China or Vietnam due to competitive labour. However, markets such as Brazil which have been imposed with tariffs of 10% may act as an alternate source and limit the benefit.
On the other hand, higher tariffs on China can force Chinese manufacturers to re-channel their exports to other consumption-driven economies such as India, which could put pressure on the margins and volumes of Indian manufacturers, specifically for sectors such as electrical equipment, industrial machinery, and chemicals, where India relies heavily on China.
Global Macros in for an Unprecedented Rough Ride; All Eyes on Forthcoming Monetary Policy Review: The US reciprocal tariff war would have wide ramifications on the world economy which has been navigating treacherous waters after the COVID. Across-the-board tariff hikes would make the US inflation trend higher and lead to a slowdown of the US economy (if not a fall in US output). The global situation is dynamic and extremely volatile. It needs careful examination at the commodity level of the tariff imposed on the competing countries.
Amid the macroeconomic turbulence, the impact on GDP growth may be different than Ind-Ra’s initial assessment of 10bp in FY26. However, since the impact of recent developments on the Indian economic growth is not unidirectional, Ind-Ra is monitoring these developments and would incorporate these in its GDP forecast in coming months. In our recent report, we had pointed out the possibility of monetary easing of 75bp in FY26. However, we had also noted that the RBI may go in for higher easing if the impact of reciprocal tariffs is higher. Thus, the Monetary Policy Committee’s growth guidance and assessment of global economic situation takes higher precedence in the forthcoming monetary policy review.
Ind-Ra’s Preliminary Sector-wise View on Relevant Sectors
Electrical Equipment – Moderately Positive: India’s electronics exports rose sharply by 2.4x to USD34.4 billion over FY21-FY24, backed by the favourable policy initiatives. Mobile phones have been a meaningful contributor to the overall export growth, contributing nearly 65% to the incremental exports. India’s electronics exports to the US were also skewed towards mobile phones (about 52%), as large original equipment manufacturers (OEMs) had been developing their manufacturing base in India as a part of China+1 strategy.
In the recent event of imposition of reciprocal tariffs, India’s electronic industry, prima-facie, appears to be better placed as the tariff imposed at 26% is materially lower than that for its competitors: China (34%+earlier tariff of 20%), Vietnam (46%), Thailand (36%), and Indonesia (32%). Re-shoring of assembling facilities such as mobile phones and other electronic gadgets back to the US appears to be an improbable solution in the near to medium term, given the labour-intensive nature (labour count of 10 required for every INR10 million investments). Nevertheless, Ind-Ra understands that the situation will continue to evolve, given that bilateral trade negotiations are scheduled towards 2H25. Ind-Ra will continue to monitor evolving risks on demand (if the entire tariff increase is passed on to consumers) and margins (if companies are expected to absorb part of the tariff increase).
Textiles – Moderately Positive: The reciprocal tariffs imposed by the US are likely to benefit the Indian textile industry, especially the players engaged in export of apparel and home textiles. This is because they will have a competitive advantage over other countries exporting to the US, given the higher tariffs have been imposed on these countries than that on India. India (US tariff: 26%) competes with countries such as China (34%), Vietnam (46%), Cambodia (49%), Bangladesh (37%); Sri Lanka (44%) and Indonesia (32%) in the textile space. However, there could be a demand slowdown in the US due to increased landed prices which may lead to a global oversupply scenario and hence, there could be a threat of incremental imports into India.
Imports into India of the products exported to the US may not be severe as the overall market for premium products at high price points would be small, but the increased tariffs could cause supply chain reorientation with competing countries shifting exports to other regions such as the European Union. The Indian textile industry however may not be able to cash on the opportunity immediately, due to the limited capacity to scale up supply immediately and would need to set up facilities and obtain approvals from international buyers which may take some time. Textile yarn and fabric exporters to competing countries may face pressure due to lower exports by those countries to the US amid a likely slowdown.
Steel – Moderately Negative: The US has exempted the imports of steel from additional reciprocal tariff, but would continue to charge a tariff of 25% under Section 232. This will provide some respite to the global steel prices. The continuation of Section 232 tariffs by the US on steel imports from China and other countries could lead to reorganisation of supply chain, keep the prices under check and expose India to the low-cost import threat from China and Vietnam. However, the government recent announcement of a 12% safeguard duty on the import of flat steel products will provide some cushion to the domestic steel industry.
Chemicals – Mixed Bag: The reciprocal tariffs are likely to have a multi-pronged impact on the chemical sector. The US is India’s largest chemical export destination, accounting for around 14% of India’s USD25.8 billion chemical exports in 11MFY25 (FY24: 13%; USD29.3 billion). Organic chemicals accounted for around 30% of India’s exports to the US while agrochemicals constituted another 20%.
While the 26% tariff imposed by the US would increase the prices of chemicals exported by India, Ind-Ra believes the higher tariffs imposed on key competitor China will improve the competitiveness of Indian chemical exporters, providing them an opportunity to increase their share of business with the US. Furthermore, many chemicals are exempt under the US executive order. Indian players that are already supplying to US-based customers stand to benefit in the near term, given that the approval process for specialty chemicals for a new entrant takes at least a few quarters.
The European Union, another key competitor, has been imposed with a little lower reciprocal tariff rate of 20%, but the cost of the production in the region per se is higher. Other key competitors exporting to the US include Canada and Mexico. Ind-Ra opines that the high tariffs are unlikely to be absorbed by producers who would pass on a large part of the increase to customers. The resultant increase in consumer prices and inflation could weigh on spending and affect demand in the US, particularly for chemicals used in discretionary segments such as textiles.
Ind-Ra also believes the high tariff imposed on China would lead to a realignment of some of the supplies into other growing economies such as India, increasing the threat of an influx of goods into India and affecting the revenue and profitability of domestic players. India has witnessed a rise in imports over the past one to two years, given the oversupply led by a slowdown in demand in both China and Europe. However, the exemption granted under the US executive order to many chemicals across sub-segments order would limit the impact.
While the domestic demand had been relatively resilient, the global oversupply and high channel inventories affected export demand resulting in a sharp correction in prices over the past couple of years after the multi-year highs witnessed during the COVID-period. A gradual pick up in volumes was witnessed in 2HFY25 with the prices of some of the commodity chemicals bottoming out. However, the interplay between improved export competitiveness and an increased import threat would be a key determinant of the chemicals sector’s recovery. Given the dynamic geo-political situation, Ind-Ra does not expect an immediate impact on the investments in the sector.
Auto Ancillaries – Mixed bag: For the domestic auto ancillary industry, the US is the largest exporting destination, accounting for 27% of the total exports of components in FY24 and contributing nearly 7.7% to the total industry revenue. The tariff imposed on India is lower than that for some of the other Asian countries such as China, Thailand, and Vietnam, providing the domestic industry with some competitive advantage. Other countries with lower tariffs namely Japan and South Korea have higher labour costs and hence, it is unlikely that global auto OEMs would look at replacing the supplies from India to those nations. Given that the US would some take time to expand its own manufacturing base to cater to the demand being met by imports, the nation might continue sourcing from countries such as India.
From the ancillaries’ perspective, part of the contracts are structured in a way that hikes in import duties are passed on to customers and hence, the tariff imposition may not impact the margins of domestic component manufacturers. However, in absence of such clause, there could be an impact on the overall margin profile. Moreover, if the impact of hike has to be borne by the ultimate customers (i.e. global OEMs), then they may consider passing it on to end-consumers, leading to higher vehicle prices which could dampen the overall vehicle demand.
Exports growth rate had toned down for the sector over the past few quarters amid macro-economic headwinds, though the impact was larger on Europe. Any material slowdown in the US could affect the margins of domestic auto ancillaries, with exports being a higher margin business for them. Ind-Ra would monitor the key developments in the industry and entities in its portfolio with higher exposure to the US.
