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The imposition of tariffs by the United States on Indian goods, particularly the recent 50% tariff (comprising 25% that kicked in on August 7 and another 25% due to come into force on August 28 as a penalty for buying Russian oil), has sparked concerns about its potential impact on India's economic growth. However, S&P Global Ratings, through its Director YeeFarn Phua, has offered a reassuring perspective. According to Phua, these tariffs are unlikely to significantly impede India's economic progress or alter its positive sovereign ratings outlook. This assertion is primarily based on India's relatively low trade orientation and its limited reliance on the US market for exports. Phua highlighted that India's exports to the US constitute only about 2% of its GDP, indicating that the country's economic fortunes are not heavily dependent on trade with the US. This suggests that the tariffs, while unwelcome, are unlikely to trigger a major economic downturn in India. S&P's confidence in India's economic resilience is further bolstered by the country's robust domestic demand and its attractiveness as an investment destination, driven by the 'China plus one' strategy. This strategy has encouraged businesses to diversify their operations and establish a presence in India to cater to its burgeoning middle class and large domestic market. These factors, combined with the exemption of major export sectors like pharmaceuticals and consumer electronics from tariffs, contribute to S&P's positive outlook on India's economic prospects. In May of the previous year, S&P had upgraded the outlook on India's sovereign rating of 'BBB-' to positive, citing the nation's robust economic growth. The ratings agency's latest projections indicate that India's GDP growth will remain steady at 6.5% in the current fiscal year, mirroring the performance of the previous financial year. This consistent growth trajectory further reinforces the view that India's economy is well-positioned to weather the challenges posed by the US tariffs. It's important to delve deeper into the rationale behind S&P's assessment and to consider the broader context of India-US trade relations. The US has emerged as India's largest trading partner in recent years, accounting for a substantial portion of India's total goods exports, imports, and bilateral trade. In 2021-25, the US accounted for about 18 per cent of India's total goods exports, 6.22 per cent in imports, and 10.73 per cent in bilateral trade. However, the key factor mitigating the impact of the tariffs is India's significant trade surplus with the US. In 2023-24, India had a trade surplus of USD 35.32 billion in goods with the US, and this figure increased to USD 41 billion in 2024-25. The overall bilateral trade between India and the US reached USD 186 billion in 2024-25, with India exporting goods worth USD 86.5 billion and importing goods worth USD 45.3 billion. This substantial trade surplus provides India with a cushion to absorb the potential negative effects of the tariffs. The exemptions granted to major export sectors like pharmaceuticals and consumer electronics also play a crucial role in mitigating the tariffs' impact. These sectors are significant contributors to India's export basket, and their exclusion from the tariff regime limits the overall disruption to India's trade flows. Moreover, the 'China plus one' strategy has significantly influenced investment flows into India. Many businesses are establishing operations in India not solely to export to the US but also to tap into the country's vast domestic market. The burgeoning middle class and the increasing consumer demand in India make it an attractive investment destination for companies seeking to diversify their operations and reduce their reliance on a single market. The emerging middle class getting larger provides a robust and expanding base for businesses to cater to. This shift in investment focus further insulates India from the potential negative effects of the US tariffs.
However, while S&P's assessment provides a degree of reassurance, it's crucial to acknowledge the potential challenges and uncertainties associated with the tariffs. The imposition of tariffs, even on a limited scale, can disrupt trade flows, increase costs for businesses, and potentially lead to retaliatory measures. The long-term impact of the tariffs on India-US trade relations remains to be seen, and there is a risk that the tariffs could escalate or be extended to other sectors. Furthermore, the tariffs could have indirect effects on India's economy, such as discouraging foreign investment, dampening consumer sentiment, or increasing inflationary pressures. These indirect effects could potentially undermine India's growth prospects, even if the direct impact of the tariffs is limited. Moreover, the global economic landscape is constantly evolving, and unforeseen events could alter the dynamics of India-US trade relations. Factors such as changes in global trade policies, fluctuations in currency exchange rates, or shifts in consumer demand could all influence the impact of the tariffs on India's economy. Therefore, it's essential to adopt a cautious and vigilant approach to assessing the long-term implications of the tariffs. In addition to the tariffs, other factors could also influence India's economic growth trajectory. These include domestic policy reforms, infrastructure development, and improvements in the business environment. The government's efforts to promote investment, streamline regulations, and enhance infrastructure could play a crucial role in sustaining India's economic momentum and mitigating the potential negative effects of external factors such as the US tariffs. Moreover, the performance of other sectors of the Indian economy, such as agriculture, manufacturing, and services, will also be critical in determining the country's overall economic health. The resilience and adaptability of these sectors will be crucial in navigating the challenges posed by the US tariffs and other global economic headwinds. The S&P Global Ratings assessment provides a valuable insight into the potential impact of the US tariffs on India's economy. However, it's important to consider the broader context of India-US trade relations, the evolving global economic landscape, and the potential indirect effects of the tariffs. The long-term implications of the tariffs remain uncertain, and a cautious and vigilant approach is warranted. India's robust domestic demand, its attractiveness as an investment destination, and the exemptions granted to major export sectors provide a degree of resilience against the tariffs' impact. However, the government's efforts to promote investment, streamline regulations, and enhance infrastructure will be crucial in sustaining India's economic momentum and mitigating the potential negative effects of external factors.
It's also important to note that S&P's positive outlook on India's sovereign rating is not solely based on its assessment of the tariffs' impact. The ratings agency also considers other factors, such as India's fiscal policy, its debt levels, and its overall economic stability. A sound fiscal policy, manageable debt levels, and a stable economic environment are all crucial for maintaining a positive sovereign rating. Therefore, the government's commitment to fiscal discipline and its efforts to manage the country's debt burden will be essential in sustaining S&P's positive outlook. Furthermore, the political and social stability of India also play a role in determining its sovereign rating. Political stability provides a predictable and stable environment for businesses to operate, while social stability fosters social cohesion and reduces the risk of unrest. Therefore, the government's efforts to maintain political and social stability are also crucial for sustaining S&P's positive outlook. The S&P Global Ratings assessment is based on the information available at the time of the assessment. However, the global economic landscape is constantly evolving, and unforeseen events could alter the dynamics of India-US trade relations. Therefore, it's essential to monitor the situation closely and to be prepared to adjust policies and strategies as needed. The government should also engage in dialogue with the US government to address the concerns that led to the imposition of the tariffs and to explore ways to resolve the trade disputes. A constructive dialogue and a willingness to compromise could help to de-escalate the situation and to prevent further trade tensions. In conclusion, the S&P Global Ratings assessment suggests that the US tariffs are unlikely to significantly impede India's economic growth or alter its positive sovereign ratings outlook. This assessment is based on India's relatively low trade orientation, its limited reliance on the US market for exports, its robust domestic demand, and its attractiveness as an investment destination. However, it's important to acknowledge the potential challenges and uncertainties associated with the tariffs and to adopt a cautious and vigilant approach to assessing the long-term implications. The government's efforts to promote investment, streamline regulations, enhance infrastructure, maintain fiscal discipline, manage debt levels, and maintain political and social stability will be crucial in sustaining India's economic momentum and mitigating the potential negative effects of external factors such as the US tariffs. Moreover, a constructive dialogue with the US government could help to de-escalate the situation and to prevent further trade tensions. By taking these steps, India can strengthen its economic resilience and ensure its continued growth and prosperity in the face of global economic challenges.
Source: Why Trump's 50% Tariffs May Not Hurt India's Growth, S&P Rating Explains