India to navigate tariffs safely; US to face recession risk, say brokerages

India is expected to "safely" navigate the tariff challenges imposed by US President Donald Trump and may even benefit from China’s losses, according to Bernstein analysts.

 

The Trump administration imposed reciprocal higher tariffs on the countries with which the US has the largest trade deficits and levied a base tariff of 10 per cent on all trading countries. 

 

The US President slapped a 27 per cent tariff on imports from India. This is higher than the 20 per cent levy for the European Union, the 24 per cent for Japan and the 25 per cent for South Korea. Calling India’s tariffs “very, very tough," Trump said he was imposing 26 per cent tariffs on all imports from India — half of what India imposes on US products. However, China was hit hard, with the South Asian country facing a tariff of at least 54 per cent on many goods. 

     

Venugopal Garre and Nikhil Arela acknowledged in the report that the initial sentiment will be turbulent but maintained their outlook for a macro recovery in the second half in their latest note. The benchmark indices recovered to trade slightly lower, after tumbling nearly one per cent.  

 

At first glance, the tariffs imposed on India seem rather high, higher than what India levies on most US items. However, two of India’s high-ticket exports -- information technology (IT) services and pharmaceuticals -- are untouched by this announcement, Bernstein said in their note. "This was in line with our earlier view that healthcare is a sensitive sector and may not see material tariff threats."  Pharmaceutical products and energy exports, which collectively account for nearly $9 billion in trade, have been exempted from the new tariff structure

 

  Sectors such as apparel and auto parts could see major tariff raises, it said, while adding that, India is protected from a competitive point of view. This is because the tariffs on several South Asian economies that compete with India on these items are even higher, analysts said. "If at all, India can gain from China’s loss, which by some measures now stares at 54 per cent tariff if the existing 20 per cent are added on top of the additional 34 per cent."

 

The risk in some sectors arise from a weakening US economy, with recession a possibility, it said. Bernstein upgraded healthcare to equal weight, given its limited impact and downgraded IT to equal weight as the US recession risk rises.  

 

US to see increased recession risk

 

Analysts believe that if these policies persist, they could drive significant inflation in the US, weakening demand and increasing recession risks. Bernstein noted that the tariffs are substantial, with nearly 60 per cent of affected imports now facing duties exceeding 20 per cent, resulting in a weighted average tariff of 28.3 per cent.

 

The large 20 per cent tariff imposed on the European Union (EU) represents the most significant incremental shock to the global outlook, according to analysts at JPMorgan. If the tariffs are implemented, the impact of inflation will be substantial, adding close to 2 per cent to the consumer price index (CPI) this year, they said. 

 

JPMorgan views the full implementation of these policies as a substantial macro economic shock not currently incorporated in our forecasts. "This shock will likely be magnified by its impact on sentiment and through the retaliation of countries facing significant increases in their tariff rates."