Moody's warns US 50% tariffs could erode India's manufacturing growth

Credit rating agency says India's manufacturing growth momentum and electronics competitiveness are at risk if tariff dispute with US persists

India’s ambitions to become a global manufacturing hub could face serious setbacks following the United States' (US) decision to sharply raise tariffs to 50 per cent on Indian exports, according to a new report by Moody’s Ratings.

 

The credit rating agency said the doubling of US tariffs significantly undermines India’s competitive edge in high-value manufacturing, especially electronics. The move stems from US objections to India’s continued imports of Russian oil.

 

“The much wider tariff gap compared with other Asia-Pacific countries would severely curtail India’s ambitions to develop its manufacturing sector,” Moody’s said, warning that recent gains in attracting global supply chains could be reversed if the issue remains unresolved.

   

Tariff shock puts trade strategy at risk

On August 6, US President Donald Trump signed an executive order imposing an additional 25 per cent penalty tariff on Indian imports. This is on top of a 25 per cent reciprocal tariff introduced earlier, bringing the total to 50 per cent. This is far higher than the 15–20 per cent rates levied on other regional economies like Vietnam, Indonesia, and Thailand.

 

India is the US’s largest trading partner in South Asia, and the tariff hike directly affects sectors that have been central to India’s 'Make in India' and supply-chain diversification push, which includes electronics, pharmaceuticals, and machinery.

 

Moody’s, Goldman estimate 0.3 pp GDP hit

Moody’s estimates that if India continues buying Russian oil and faces the full brunt of the tariffs, annual gross domestic product (GDP) growth could slow by approximately 0.3 percentage points — an assessment echoed by Goldman Sachs earlier this week. But the longer-term risk, it said, lies in the loss of manufacturing momentum.

 

India's manufacturing momentum at risk

Over the past few years, India has worked to position itself as an alternative to China in global manufacturing. The government has launched incentive schemes, improved infrastructure, and promoted investment in electronics, semiconductors, and other high-tech sectors.

 

Those efforts have begun to bear fruit, with companies shifting parts of their supply chains to India. But Moody’s warned that the tariff hike could erode this progress by making Indian exports less competitive in the US market, and by extension, less attractive to foreign investors.

 

If India reduces imports of Russian oil to avoid US penalties, the shift could cause oil supply disruptions and raise energy costs, adding further stress to energy-intensive industries.

 

“A pivot away from Russian oil would tighten global supply, raise prices, and pass through to higher inflation,” Moody’s said

 

Diplomatic window remains

Despite the risks, the tariff order has a 21-day implementation window, allowing time for possible negotiations. Moody’s said a compromise is likely, but warned that prolonged uncertainty could already begin affecting investment decisions.

 

Even if macroeconomic indicators remain stable — inflation hit 2.1 per cent in June, the lowest since 2019, and foreign reserves remain healthy. Moody’s cautioned that investor confidence in India’s manufacturing outlook could weaken if the situation escalates.