Tariff impact: Nomura cuts FY26 GDP forecast to 5.8% in worst-case scenario

Data from the Annual Survey of Industries (ASI) show that these sectors together employed around 21 million workers directly and via contractors in 2023, Nomura said

Nomura has cut India's GDP (gross domestic product) forecast to 5.8 per cent to fiscal 2025-26 (FY26) from the current 6.2 per cent in the worst-case scenario where the 50 per cent tariffs on India continue for the rest of the year.

As a base-case, however, the GDP forecast has been lowered to 6 per cent if the penalty stays for only three months.

“Our base case assumes that the reciprocal tariffs will stay at 25 per cent through FY26, but the 25 per cent penalty will be removed after November. We recently lowered our FY26 GDP growth to 6 per cent y-o-y from 6.2 per cent, due to weaker exports, spillovers to the labour market and investments, which we expect will more than offset any GST boost,” wrote Sonal Varma, chief economist for India and Asia ex-Japan at Nomura, in a recent note co-authored with Aurodeep Nandi.

 

Nomura, however, has retained their FY26 CPI inflation forecast of 2.7 per cent y-o-y, though see downside risks, amid likely disinflation due to GST (goods and services tax) changes and weaker demand. Nomura expects the current account deficit to widen marginally to 1 per cent of GDP in FY26 (earlier forecast: 0.8 per cent).  The US implemented the additional 25 per cent Russian penalty on Indian imports from 27 August, as planned, taking the announced tariff rate to 50 per cent. According to reports, around 60 per cent of US imports from India will face 50 per cent tariffs, taking the effective tariff rate to 33.6 per cent.

Some sectors under Section 232 tariff investigation, such as semiconductors and electronics, pharmaceuticals, lumber, energy, and bullion do not attract any tariffs for now; the tariff rate on finished autos and parts is 25 per cent and on steel, aluminium and copper is 50 per cent. 

The US is India’s largest goods export destination, accounting for close to 20 per cent of total exports (at 86.5 billion) and around 2.2 per cent of GDP in FY25.

Key exports to the US include electronics, textiles, gems and jewellery, pharmaceuticals, chemicals, industrial machinery and other household items such as leather, plastic, footwear, paper and glass articles.

“Targeted fiscal and credit support for exporters is likely, with its direct fiscal cost less than 0.1 per cent of GDP. While the fiscal arithmetic looks uncertain, due to lacklustre direct tax collections, frontloaded spending and ambiguity over the GST impact, we believe the fiscal deficit target of 4.4 per cent of GDP is still attainable,” Nomura said.

It expects 25 basis points (bp) rate cuts each in October and December, taking the terminal rate to 5 per cent by end-2025.

21 million workers impacted

Nomura expects higher tariffs to adversely affect the economy via three channels. First is a direct hit to export orders in affected sectors such as textiles, gems and jewellery, household items and seafood, where the 50 per cent tariff imposition will effectively prove to be a trade embargo.

The hit, Varma and Nandi said, will likely be amplified for MSME units, which lack the financial wherewithal to withstand the tariff shock.

Second, weaker export orders threaten job losses in employment-intensive sectors such as textiles, apparel, metals, chemicals, gems and jewelry, and leather goods.

"Data from the Annual Survey of Industries (ASI) show that these sectors together employed around 21 million workers directly and via contractors in 2023, and there is probably a sizable cohort of informal workers relying on them for their livelihood too,” Varma and Nandi said. 

Finally, a challenging external environment may impact broader business confidence, which could lead to continued weakness in private capex.

While there is an argument that the gains from GST rationalisation measures may offset the tariff-led hit, Nomura believes over the medium-term, the GST reforms are positive.

“In the near-term, expectations of lower prices (after the GST cut) will lead to lower demand in the run-up to the GST’s implementation (August-September), followed by a surge in demand afterwards (October-November), such that overall demand is largely similar,” Nomura said.