Trade, Tariffs and Talks: T’s still to be crossed !!

What’s the Point?

• Tariff Surprise: US has raised tariffs on Indian goods to over 25%, with an additional undefined penalty linked to India’s dealings with Russia.
• Limited Market Impact: Most listed Indian companies have a predominantly domestic revenue. India’s key global sectors like Pharma and IT remain unaffected so far. Industries with large export contribution from US (Textiles, Gems & Jewellery) do not have significant listed presence, although with them being large employers, second-order impact on rest of the economy needs to be watched out for.
• Watchful Optimism: Tariffs may be part of US negotiating tactics, with talks expected to continue later this month. India can use this situation to double down on reforms and diversify its global trade partnerships.

The Tariff Curveball

Recently, US imposed 25% reciprocal tariff on imports from India, along with an additional undefined penalty tied to India’s business dealings with Russia. Consequently, with effect from 7th August, 2025, the tariff rate is set to rise by at least 15% from the existing 10% which has been in place since April’25. While India was one of the first countries to start negotiating with US, trade talks with US seem to have hit a roadblock owing to India’s reluctance to cede ground on Agriculture and Dairy leading to the current impasse.

India-US Trade in numbers^

How does India’s revised tariff compare with other countries now?

Brazil - 50%, Canada - 35%, China - 30%, India - 25%+undefined penalty, Vietnam - 20%, Thailand - 19%, Indonesia - 19%, EU - 15%, Japan -15%, UK-10% (Note: Rates exclude product specific tariffs)

• While India’s tariffs of 25%+ Penalty is higher than expected, its equally noteworthy that even for nations that have signed deals with the US (viz. EU, Japan, Indonesia, Vietnam) the tariffs will still be elevated (15-20% range) and in return, US has secured significant concessions from these countries.
• They key variable here though remains the additional penalty levied for India’s business dealings with Russia. The penalty’s level while not yet disclosed, could make a noteworthy difference to India’s overall tariff.

Which sectors could be impacted?

• Textiles: The US is India’s biggest textile export market, making up ~50% of India’s Textile exports. India’s export competitiveness boosted by China+1 and instability in Bangladesh could now be offset by the new US tariff. Further, countries like Vietnam with competitive cost of production have relatively favourable tariff (20%) too.
• Gems and Jewellery: With ~30% of its total exports going to US, steep tariff increase could impact this sector, more so in the unlisted space. As a large employer of labour, impact of tariff on this sector needs to be monitored.

Relief for key sectors though!!

• Pharma: While US remains a key market, Pharmaceuticals remain exempt from its newly expanded tariff regime. Given their critical role in affordable healthcare (40% of US’s generic drug demand), Indian drugmakers are likely to stay resilient, highlighting the sector’s key role in India-US trade.
• Auto components: Auto components are already subject to 25% tariff since May’25 and is exempt from the country-specific reciprocal tariffs. Since the levy on auto parts is the same for all countries, there is no impact on competitiveness of products made in India.
• IT Services: India's largest services export category remains untouched as services have been out of purview.

No need to press the Panic Button

• India’s economy is largely domestic-driven in nature and barely 10% of NIFTY 500 companies’ revenue is driven by exports. Revenue from US is even lower.
• Sectors most impacted by US tariffs happen to be Gems & Jewellery, Leather and Textiles which do not have large representation in the listed space. Pharmaceuticals and Electronics remain in the exempted list.
• While US is a key export destination, India has a wide array of key trading partners for most industries. India could aim to strengthen ties with other economies through FTAs like the India-UK deal recently.
• India can use this crisis to double down on Aatmanirbhar Bharat and Make in India, cutting reliance on imports in key sectors. Reforms aimed at boosting labour productivity and faster adoption of technology could be imperative to make Indian manufacturing globally competitive and less vulnerable to such events.
• Going by recent developments, the latest round of reciprocal tariff may not be cast in stone. Deadlines have been extended multiple times earlier too. With another round of discussion scheduled later in August, the recent announcement could well be a bargaining tool for US. Further, Inflationary impact of Tariffs on US economy cannot be undermined. Something US policy makers would be mindful of.
   

Key Takeaway: While the US tariff hike presents a short-term hurdle for select export sectors, the broader impact on India’s economy and equity market remains limited. India's domestic consumption-driven growth, resilient listed space, and diversified trade ties act as strong buffers. Considering India’s undeniable importance as a large consumer market, there is a reasonable likelihood of a mutually beneficial deal culminating between India and US. For investors though, this is a reminder that diversification across sectors and asset classes is a key pillar of investing.

^Sources: Kotak Institutional Equities, CMIE, Ministry of Commerce and other publicly available information

About Tuesday’s Talking Point (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. Please provide your feedback at this link: https://forms.office.com/r/Cr8JNjMGWk

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.