US Reciprocal Tariffs Will Have Minimal Impact On India’s Economy, Says S&P. Here's Why

Phua noted that the fiscal 2025-26 budget will support growth in the coming years, mainly through boosting domestic demand via tax cuts for households

Phua suggested that the US is unlikely to impose higher tariffs on pharmaceuticals, especially generic drugs from India

Source : ABPLIVE AI

S&P Global Ratings said on Wednesday that the impact of the US reciprocal tariff on India will be limited, as India’s economy is primarily domestically driven with less dependence on exports. YeeFarn Phua, Director of Sovereigns and International Public Finance Ratings for Asia-Pacific at S&P Global, also forecasted that India will experience GDP growth of 6.7-6.8 per cent over the next two years.

He noted that the fiscal 2025-26 budget will support growth in the coming years, mainly through boosting domestic demand via tax cuts for households. He added that GDP growth is now stabilising to a more "sustainable level."

"The government remains very much focused on investment-led growth and also on agriculture sector reforms. However, we do think that economic expansion in India is startling to normalise towards a more sustainable level after real growth had averaged 8.3 per cent over the last three years post-pandemic,” Phua said.

GDP Projections

"Right now, we anticipate that consumer spending and public investments will maintain real GDP growth at around 6.7 to 6.8 per cent in the next two years. These growth rates, even though slower than before, continue to place India above sovereign peers at similar income levels, and we do believe that this will continue to support fiscal revenue growth despite the income tax cuts," he added.

Official projections indicate that the Indian economy is expected to grow at 6.4 per cent in the current fiscal year (2024-25), down from 8.2 per cent in 2023-24. S&P Global Ratings has assigned India a 'BBB-' rating, the lowest investment-grade rating, with a positive outlook, which was upgraded from stable in May 2024.

Fiscal Deficit

Additionally, S&P noted that India's fiscal metrics remain strong, with the tax revenue-to-GDP ratio increasing to around 12 per cent in recent years. The central government’s deficit has also been lower since the pandemic years.

S&P believes that India will meet its fiscal deficit targets of 4.8 per cent for the current fiscal and 4.4 per cent for the next.

"These targets actually are quite consistent with our projections. At the moment, there are some talks in the market that India might face difficulties in meeting its fiscal deficit targets because of potential revenue loss from lifting the threshold for minimum taxable income, and also in the face of slow economic growth,” noted Phua.

"We do believe that the government will meet those deficit targets, largely because there are continued large dividends coming from the central bank, as well as potential capex under-spending on the expenditure side. Also, to add, the Indian government has a strong track record of meeting targets in terms of revenue and also deficits," Phua said.

When asked about the impact of US tariffs on India, Phua explained that India's economy is primarily domestically focused, and its exports to the US are mainly in services, which are less affected by tariffs, reported PTI.

"India's dependence on exports for growth is not that great. So, therefore, I think the impact (of US tariffs) will be more or less limited," Phua stated. He added that sectors more exposed to higher tariffs on the goods side include jewellery, pharmaceuticals, textiles, and chemicals.

Phua suggested that the US is unlikely to impose higher tariffs on pharmaceuticals, especially generic drugs from India, as this would raise healthcare costs in the US. However, textiles and, to a lesser extent, chemicals are more vulnerable to tariff increases.

"If we were to reimagine that scenario for the first Trump administration to unfold again, I think overall, the impact on India should be quite minimal," Phua remarked.

In 2018, during Donald Trump's presidency, the US imposed an additional 25 per cent import duty on steel products and 10 per cent on certain aluminium products. In retaliation, India levied additional customs duties on 28 American products in June 2019. After more than five years, the US removed tariffs on steel and aluminium imports from India on July 3, 2023.