US tariffs may lower India's growth by 30 bps over a year, says HSBC report

The 25 per cent tariff imposed by the President of the United States (US) Donald Trump on India is likely to lower growth by 30 basis points (bps) over a year, according to an HSBC report. The growth drag may further rise to 70 bps with a 50 per cent tariff, it added. The report titled 'India Economics: Clouds lifting, or just shifting?' was released on Tuesday.

"The 25 per cent + 25 per cent tariff rates imposed by the US authorities on India’s exports have dimmed some of the growth prospects," the report said. Along with the 25 per cent tariff in effect, the US had imposed an additional 25 per cent penalty on India for importing crude from Russia. The additional penalty is set to come into effect from August 27.

Around 20 per cent of India’s overall exports go to the US, valued at 2.2 per cent of gross domestic product (GDP). Although one-third of these exports remain exempt from the tariffs, a 50 per cent tariff could lower growth, the report said.

Many of the affected exports, including jewellery, textiles, and food products, come from labour-intensive small firms, therefore, disruptions will impact domestic consumption, it said. If the export outlook weakens, it may also reduce foreign investment and slow corporate spending, which forms 12 per cent of GDP, the report added.

Global developments to affect economy

The report said that the tariff outlook remains uncertain, depending on US-Russia-Ukraine peace talks and India-US trade negotiations. It noted that global developments involving Trump, Russian President Putin, and Ukrainian President Zelenskyy will determine the impact of the oil penalty. Citing Bloomberg, it added that Trump has urged Putin to hold a summit with Zelenskyy within the next two weeks.

Tax cut may drive growth

The Goods and Services Tax (GST) reforms announced by Prime Minister Narendra Modi during the Independence Day speech are likely to boost demand across segments, the report said. "Immediate tax cuts could spur demand across products –food, beverages, consumer durables, autos, hotels, cement, and building materials. Efficiency gains of moving to a simpler and more predictable tax regime with fewer rates could raise India’s potential GDP growth over time," it added.

On 15 August, PM Modi announced an overhaul of the GST tax regime, slashing rates across a range of products by moving the majority of the items in the 12 per cent and 28 per cent slabs to the 5 per cent and 18 per cent slabs, respectively. The system of four key GST rates (5 per cent, 12 per cent, 18 per cent, and 28 per cent) is being simplified into two main rates (5 per cent and 18 per cent) alongside a special rate of 40 per cent for seven sin goods and luxury vehicles.

The report estimates that while some products will be moved to lower tax buckets, a minority may be pushed up. The cost to the exchequer will be around 0.4 per cent of the GDP. "In the GST spirit, this could be equally split between the central and state governments," the report said.