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The recent imposition of a 50% tariff by the United States on goods imported from India is anticipated to create significant headwinds for the Indian economy. According to Moody's, the elevated tariffs could negatively impact India's economic growth trajectory and exacerbate inflationary pressures. The rating agency's analysis suggests that if India continues to rely on Russian oil despite the increased tariff on its exports to the U.S., which is a major export destination, the country's real GDP growth could be reduced by approximately 0.3 percentage points from the initially projected 6.3% for fiscal year 2025-26. This projection highlights the potential vulnerability of the Indian economy to the trade policy changes implemented by the U.S.
However, the alternative scenario of reducing Russian oil imports to mitigate the impact of the tariffs also poses considerable challenges. India's reliance on imported oil makes it difficult to secure alternative sources of crude petroleum in sufficient quantities and within a reasonable timeframe. Any disruption in the supply of oil to the Indian economy could further hinder economic growth. Given that India is one of the world's largest oil importers, a shift away from Russian oil would likely tighten the global oil supply, resulting in increased prices and subsequent inflationary pressures. A larger import bill, coupled with reduced competitiveness due to the tariffs, could also lead to a wider current account deficit, potentially discouraging foreign investment inflows.
Despite these challenges, Moody's acknowledges that India possesses sufficient foreign-reserve currency buffers, which could provide some resilience against external volatility. The government's response to the tariff obstacles will likely depend on the magnitude of their impact on economic growth. While a fiscal policy response is possible, Moody's anticipates that the government will maintain its focus on gradual fiscal and debt consolidation. This suggests a cautious approach to mitigating the economic effects of the tariffs, prioritizing long-term fiscal stability over immediate relief measures.
Furthermore, the article notes that other countries in the Asia-Pacific region face lower tariff rates, ranging from 15% to 20%, which could give them a competitive advantage over India in the U.S. market. This disparity in tariff rates could potentially divert trade flows away from India and towards other countries in the region, further impacting India's export performance. The article also highlights the fact that India has been able to purchase Russian oil at prices below the global market rate due to the price cap of $60 per barrel. This has helped to insulate India's inflation from global commodity price movements and has also alleviated pressures on the country's current account deficit. However, if India were to discontinue its oil imports from Russia for the remainder of fiscal year 2026, the country's fuel bill could increase significantly, potentially reaching $9 billion in fiscal year 2026 and $11.7 billion in fiscal year 2027, according to estimates by SBI Research.
The State Bank of India (SBI) estimates that if all countries were to halt their oil purchases from Russia, the global crude oil price could increase by 10% if other countries do not increase their production. This underscores the potential impact of geopolitical factors on global oil markets and the Indian economy. India's reliance on Russian crude oil has increased significantly in recent years, with imports rising from $2.8 billion in 2021 to $56.8 billion in 2024. This corresponds to an increase in India's share of total crude oil imports from 2.2% to 35.5%, making India Russia's largest oil importer.
In terms of volume, India is projected to import 88 million metric tons (MMT) of oil from Russia in fiscal year 2025, out of a total import volume of 245 MMT. Besides Russia, India also sources oil from Iraq, its top supplier before the war in Ukraine, as well as from Saudi Arabia and the UAE. The article emphasizes that since Mr. Trump's executive order has an effective date of 21 days after its signing, there is still room for negotiations in the coming weeks. Moody's concludes that India's response to these developments will ultimately determine the impact on its growth, inflation, and external position.
India has significantly increased its crude oil imports from Russia since 2022, as demand from Russia's traditional customers declined due to sanctions related to its invasion of Ukraine. According to Moody's, the wider tariff gap compared with other Asia-Pacific countries beyond 2025 could severely limit India's ambitions to develop its manufacturing sector, particularly in higher value-added sectors such as electronics, and may even reverse some of the progress made in attracting related investments. This highlights the long-term implications of the U.S. tariff policy for India's industrial development and its ability to compete in the global economy. The interplay of tariff policies, oil imports, and geopolitical factors creates a complex economic landscape for India, requiring careful policy decisions to mitigate potential negative impacts and sustain economic growth. The government's ability to navigate these challenges will be crucial in shaping India's economic future.
The Moody's report presents a comprehensive analysis of the potential risks and challenges that India faces due to the increased tariffs imposed by the United States. While the report acknowledges India's foreign reserve buffers and the government's commitment to fiscal consolidation, it also highlights the potential for slower economic growth, higher inflation, and a wider current account deficit. The report underscores the importance of India's response to these developments and the need for careful policy decisions to mitigate the negative impacts. The analysis also points to the competitive disadvantage that India may face compared to other Asia-Pacific countries with lower tariff rates, which could affect its export performance and industrial development. Overall, the Moody's report serves as a cautionary note, emphasizing the potential for significant economic challenges for India in the face of increased trade barriers and geopolitical uncertainties. The long-term impact on India's manufacturing sector, particularly in higher value-added sectors, remains a key concern, highlighting the need for proactive policies to ensure sustainable economic growth and global competitiveness.
The situation underscores the intricate balance India must strike between securing affordable energy sources and navigating complex trade relations with major economic powers. India's strategic decisions concerning Russian oil imports will have significant implications for its fiscal health, inflationary pressures, and overall economic growth. The potential for retaliatory measures or further escalation of trade tensions between the US and India further complicates the economic landscape. The need for diversified trade partnerships and a robust domestic manufacturing sector has become more evident. The increased tariffs serve as a reminder of the vulnerability of economies heavily reliant on exports to a single market. A proactive and multi-faceted approach is crucial for India to mitigate the risks associated with the tariffs and to maintain a stable and sustainable economic trajectory. This includes exploring alternative trade agreements, investing in domestic infrastructure, and promoting innovation in key sectors. Furthermore, diplomatic efforts to resolve the trade dispute with the US are essential to avoid further economic disruption. The long-term prosperity of India hinges on its ability to adapt to the changing global economic environment and to capitalize on its strengths while addressing its vulnerabilities.
The reliance on Russian oil, while currently providing a cost advantage, also exposes India to geopolitical risks and potential disruptions in supply. The need for diversification in energy sources and investments in renewable energy technologies is becoming increasingly urgent. The government's commitment to gradual fiscal and debt consolidation may limit its ability to implement large-scale stimulus measures to counter the negative impacts of the tariffs. Therefore, a targeted and efficient approach to fiscal policy is essential. The focus should be on supporting key sectors, promoting exports, and attracting foreign investment. The challenges posed by the tariffs also present an opportunity for India to strengthen its domestic industries and to reduce its dependence on imports. By promoting innovation, entrepreneurship, and skill development, India can enhance its competitiveness and create a more resilient economy. The long-term success of India's economic strategy will depend on its ability to navigate these complex challenges and to create a sustainable and inclusive growth model. The increased tariffs serve as a wake-up call, highlighting the need for a proactive and strategic approach to economic policy.
Source: Doubled U.S. tariffs to increase risks to India’s growth, inflation, says Moody’s