Tariff shocks and tailwinds: Risks and openings for India's economy

The global tariff war poses risks but also offers India a chance to position itself as a go-to destination for firms relocating from China

Tariff measures announced by the United States (US) on April 2 (later suspended until July 9), along with countermeasures — especially by China — are a major negative shock to the global economy. The International Monetary Fund (IMF) now projects global growth to slow to 2.8 per cent in 2025, down from the 3.3 per cent forecast in January.

 

India will also be adversely affected, though not to the same extent as many other major emerging market economies (EMEs). The Indian economy is largely driven by domestic demand, with total exports to the world and the US constituting 22 per cent and 2 per cent of its gross domestic product (GDP), respectively. These shares are lower than those of many other EMEs. The IMF has revised India’s growth forecast downward by 30 basis points to 6.2 per cent for 2025–26.

 

A slowing down of the global economy and growing uncertainty have given rise to some other risks for the Indian economy. First, a major casualty of the ongoing tariff war could be the domestic private capital expenditure (capex) cycle, which was beginning to show some signs of revival after remaining depressed for several years. In an environment of weakening global demand and heightened uncertainty, corporations may now further delay their investment plans. This would adversely affect India’s growth prospects, as well as make it more challenging to improve general government finances and reduce the debt-to-GDP ratio to a sustainable level.

 

Second, the trade war will also impact India’s information technology (IT) services exports. Though the US tariffs target only merchandise exports, IT services growth will also be adversely affected due to a slowing down of the global economy in general, and of the US economy in particular. IT services exports are extremely sensitive to global demand; it is estimated that a 1 per cent slowdown in the global economy reduces India’s IT exports by over 2 per cent. Exports of IT services could particularly take a big hit, if the US economy faces recession, the probability of which has increased following the April 2 tariff measures.

 

 On the positive side, the last trade war between the US and China during 2018-20 led to an increased demand for Indian IT services, as many US companies reduced their dependence on Chinese IT service providers and increased their outsourcing from Indian IT firms. In fact, this phenomenon was also observed in the case of pharmaceutical exports. However, it will have to be seen whether a similar pattern  repeats this time.

 

Third, a sharp increase in tariffs on intermediate inputs, which crisscross many countries before converting into final goods, have disrupted complex global supply chains. Indian manufacturers of electronics, auto components and pharmaceutical ingredients, among others, depend on imports from China. Metal prices remain volatile due to trade tensions because of which manufactures and exporters of metal in India could also be impacted. Furthermore, there is a risk of dumping of cheap steel from China against which we need to guard.

 

The global economic slowdown also has some positives for the Indian economy. First, the slowdown is hugely negative for global commodity prices. Brent crude prices plummeted from over $75 a barrel on April 1 to $63 on April 8, before rising again to $68 on April 17. The IMF has assumed a 15.5 per cent decline in oil prices in 2025 in its global growth projections. This should cushion India’s current account deficit and help contain inflation.

 

Second, a slowdown in the US economy and growing uncertainty about its trade relations could lead to a significant shift in portfolio flows out of the US and into emerging economies. As mentioned earlier, India is expected to be less affected by the ongoing tariff war. This combined with the fact that its growth prospects are much better than those of many other EMEs, India could be expected to attract large portfolio flows. Significantly, valuations of Indian equities have become attractive again after a sharp correction during October 2024-February 2025. Reflecting the renewed interest in the Indian equity market, foreign institutional investors have turned net buyers from April 16, after being net sellers for the past few months.

 

Third, disruption in the functioning of global value chains, which represent nearly 70 per cent of all international trade, could give a further fillip to the China-plus-one strategy. Even 10 years after the China-plus-one strategy caught attention, India has not been able to take much advantage of it. Major beneficiaries of China-plus-one strategy have been Southeast Asian economies. The US has proposed lower tariffs for India relative to many of its competitors. India, therefore, is much better placed to take advantage of China-plus-one strategy than many other EMEs. This is a unique window of opportunity and India needs to do “whatever it takes” to establish itself as a dependable destination for all such firms planning to relocate their manufacturing base out of China.

 

Fourth, the reciprocal tariff of 26 per cent by the US for India is much lower compared to that levied on many other EMEs: China (145 per cent), Cambodia (49 per cent), Vietnam (46 per cent), Thailand (36 per cent), Bangladesh (37 per cent) and Indonesia (32 per cent). This has improved India’s comparative advantage over other competing countries. For instance, India would have a comparative edge in apparel and textiles (over China, Vietnam and Bangladesh). China is the largest supplier of apparel, accounting for 22 per cent of total US apparel imports. Indian manufacturers need to take advantage of this to boost our textiles exports.

 

To sum up, while the immediate fallout of the tariff war on global trade and growth is clearly evident, it is difficult to gauge at this stage how things will unfold over the medium term. Overall, however, India is expected to be relatively less affected compared to many other EMEs. Also, the ongoing trade war has presented India with a great opportunity to become a major player in the global supply chain.

The author is senior fellow, Centre for Social and Economic Progress, New Delhi. The views are personal