Tuesday's Talking Points
“Reciprocal” Tariffs – Are there Fresh Concerns for India?
What’s the Point?
On April 2, 2025, the US Government increased its average tariff rate, announcing “reciprocal” incremental tariffs on a country-by-country basis starting April 9, 2025. China has already retaliated by imposing 34% tariff on all goods imported from the US, while the European Union is seemingly preferring an approach to negotiate. Fears of a global recession have caused a sharp reaction in equity markets. Major indices fell between April 02 and April 07, 2025, such as the S&P 500 Index by 10.7%, Nikkei 225 Index by 12.5%, Hang Seng Index by 14.5% and FTSE 100 Index by 10.5%. Apart from the direct trade impact, concerns have been raised on second order impacts, such as input industries, and overall capex sentiment. India's current low share in US imports, manageable US trade surplus, and potentially low impact on current exports provides relative comfort on India’s growth prospects.
Numbers in Perspective
Source: US Bureau of Economic Analysis (USBEA), www.whitehouse.gov
US Government’s Key Concern behind the Announcement of Reciprocal Tariffs
According to the factsheet released by the US Government on the tariff imposition, “the trading relationship between US and its trading partners has become highly unbalanced”. The factsheet states that the US Government believes that there is a “need to maintain robust and resilient domestic manufacturing capacity, especially in certain advanced industrial sectors like automobiles, shipbuilding, pharmaceuticals, technology products, machine tools, and basic and fabricated metals”. Hence, it announced an additional ad valorem duty on all imports from all trading partners starting April 09, 2025.
How is India placed amidst the Imposition of Tariffs on US’s Trading Partners?
India’s exports to the US account for ~2% of its GDP. Compared to other export-oriented counties, the reciprocal tariff rate imposed on India is much lesser. Hence, it is being believed that the impact of the tariffs on India is not expected to be severe with most sectors not being directly impacted.
-
Trade Imbalance opening Opportunities of a Bilateral Trade Agreement
As of January 2025, India shares a trade surplus of US$48.6 billion with US (Trade Surplus for 2024: US$46 billion – 10th largest country by trade deficit for US as per Chart 1), accounting for only 2.7% of the total imports of US. This signals to an increase in opportunity to increase trade between both countries. To reduce the US administration’s concern on high trade imbalance, India could potentially shift imports from other places to US.
Following the tariff announcement, Ministry of Commerce (MoC) has stated that it is engaged with all stakeholders, including Indian industry and exporters, to understand their assessment of the tariffs. In addition to that, discussions are ongoing between Indian and US trade teams for the expeditious conclusion of a mutually beneficial, multi-sectoral Bilateral Trade Agreement. These cover a wide range of issues of mutual interest including deepening supply chain integration. These discussions are focused on enabling both nations to grow trade, investments and technology transfers – an important factor considering that the Prime Minister of India and the US President have announced “Mission 500” on February 13, 2025, which aims to more than double the bilateral trade to US$500 billion by 2030.
-
Low Potential Impact on India’s Manufacturing
The Indian Government has focussed on a strategy to increase India’s manufacturing capabilities through initiatives like Production-Linked Incentive (PLI) Scheme and the PM Gati Shaki Mission. While these efforts have seen some success, India is currently less linked to the global value chain-related output in the manufacturing industry, with India standing at 4% of the output vs China standing at 41% of the output as per Morgan Stanley Research.
Conclusion
After a brief period of FII inflows in March 2025, Indian equity markets have witnessed a net FII outflow of ₹13,447 crore between March 28, 2025 and April 04, 2025 driven by the announcement of reciprocal tariffs. Since the announcement, Indian equity markets have witnessed a sharp fall, with the NIFTY 50 Total Returns Index falling by ~5% between April 02, 2025 and April 07, 2025. While this raises some concern, the fall has been much lesser than other global indices since the impact on India remains relatively low considering the structural position of India and the lower pressure on India’s import bill due to fall in Brent Crude Oil Prices by 14.3% to US$64.2 per barrel between April 02, 2025 and April 07, 2025. India has already taken steps to reduce elevated tariff rates for select products like luxury cars, solar cells and machinery, and could step up purchases in defence equipment and energy. The announcement of reciprocal incremental tariffs by US has significant global supply chain and macroeconomic implications, and it would be important to monitor further developments.
Sources: USBEA, WhiteHouse.gov, CMIE, Bloomberg, MoC, MS, PIB, and other publicly available information
About Tuesday’s Talking Points (TTP): TTP is an effort by HDFC AMC to guide key conversations in the Indian financial markets and investing ecosystem. We aspire to do this by providing relevant facts, along with our perspective on the issue at hand. If you have a topic that you would like to be featured here, please write to us at [email protected]
Disclaimer: Views expressed herein are based on information available in publicly accessible media, involve known and unknown risks and uncertainties that could cause actual results, performance, or events to differ materially from those expressed or implied herein. The information herein is for general purposes only. Stocks/Sectors/Views referred are illustrative and should not be construed as an investment advice or a research report or a recommendation by HDFC Mutual Fund (“the Fund”) / HDFC Asset Management Company Limited (HDFC AMC) to buy or sell the stock or any other security. The Fund/ HDFC AMC is not indicating or guaranteeing returns on any investments. Past performance may or may not be sustained in the future and is not a guarantee of any future returns. The recipient(s), before taking any decision, should make their own investigation and seek appropriate professional advice.
MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
