Tariff war clouds India's growth outlook, but fundamentals stay strong

However, economists say country's strong fundamentals, lower inflation hold hope

tariffs, trade, us india — Illustration: Binay Sinha

Ruchika Chitravanshi Shreya Nandi New Delhi

4 min read Last Updated : Mar 31 2025 | 11:20 PM IST

The growth outlook for the Indian economy in the financial year beginning April 1 may be under a shadow of the looming threat of reciprocal tariffs, trade uncertainty, and geopolitical tensions, but economists argue that the inherent strengths and declining inflation would keep India in good stead.

Last week, the Union Ministry of Finance (FinMin) cautioned about growth implications of the escalating tariff war unleashed by US President Donald Trump as part of his ‘America First’ policy. Trump has promised to launch reciprocal tariffs on trading partners on April 2, after imposing substantial tariffs on steel, aluminium, and automobiles.

“There are a lot of unknowns right now. We don’t know how those risks will play up,” said Vivek Kumar, economist at QuantEco Research.

While the kind of application of reciprocal tariffs may have is not known, it could impact global growth, he said.

“Decline in global growth is a possibility. The indirect impact of this on the Indian economy could be of 5-10 basis points (bps), and the direct impact could be somewhat more,” Kumar added.

The Economic Survey has projected the Indian economy to grow between 6.3 per cent and 6.8 per cent in FY26, while the Reserve Bank of India (RBI) has estimated growth at 6.7 per cent during the financial year.

Going forward, according to some economists, the trade uncertainty will settle down and give greater clarity to investors as well. Coming at the back of slower growth in FY25, many expect a pickup in overall growth in the next financial year, driven by softening inflationary pressure and strengthening domestic consumption demand.

“We believe growth in FY26 may potentially reach higher than the market consensus. Lower inflation, range-bound global oil prices, government tax stimulus, lower borrowing rates and more liquidity, and a more certain global environment by the end of the year are expected to boost sentiments,” said Rumki Majumdar, economist, Deloitte India.

“The service sector has done comparatively better and is expected to continue its growth streak. The manufacturing sector is also now showing improvement, and going forward, the growth rate of the manufacturing sector is likely to contribute to gross domestic product (GDP) growth in a bigger way,” said Jyoti Prakash Gadia, managing director of investment banking firm Resurgent India.

Trade experts, however, have sounded caution on the changing geopolitical landscape and the escalating tariff war.

In a recent report, Nomura said that if India’s tariff on imports from the US is 9.5 per cent, and the US’s tariff on imports from India is 3 per cent, then the reciprocal tariff would be 6.5 per cent. “However, we suspect the criteria for US reciprocal tariffs will be much broader than that, and indeed more difficult to quantify,” it added.

Biswajit Dhar, distinguished professor at the Council for Social Development, said exports from India would be under pressure due to geopolitical uncertainties. “The outlook for two of the major export destinations – the US and the EU – doesn’t look good. Adding to that, we have not been able to diversify our exports much. We have failed to penetrate the Chinese market as well,” he added.

The US is India’s biggest export destination for goods with a share of 17.7 per cent, while the EU is the second largest with a 17.4 per cent share. As far as the US market is concerned, exports will be under pressure owing to the impending reciprocal tariff. The EU will also face headwinds due to the changing geopolitical dynamics. As a result, this may affect India’s exports to the trade bloc too, Dhar said.

According to government data, outbound shipments from India contracted at the sharpest pace in 20 months, falling 10.9 per cent year-on-year to $36.91 billion in February, amid softening global petroleum prices and escalating economic uncertainty fueled by geopolitical tensions. On a cumulative basis, India’s merchandise exports remained flat, totaling $395 billion in the first 11 months of FY25.