GDP Growth: Moderation Triggered by External Shock
- The newly imposed U.S. tariffs are expected to dampen India’s FY26 GDP growth by 20–40 basis points.
- Revised Growth Trajectory:
- Union Budget Estimate: 6.8%
- BoB Revised Forecast: 6.6% (↓20 bps)
- Barclays Forecast: 6.5% (↓30 bps)
- Quantitative Implication:
- GDP expected to fall from a projected ₹200.7 lakh crore to between ₹200.1–₹200.3 lakh crore.
- The deceleration is externally induced and not due to weakening domestic fundamentals, indicating a vulnerability to trade policy shocks.
External Sector Pressure: Export Exposure Concentration
- Tariff-sensitive exports account for 9–11% of India’s shipments to the U.S., making the economy moderately exposed.
- High-Risk Segments:
- Electronics and machinery: capital-intensive, large backward linkages
- Precious stones and garments: SME-heavy, labor-intensive
- FY24 Baseline:
- U.S.-bound exports = ₹6.4 lakh crore
- Impact Projections:
- BoB: ₹64,000 crore decline (10% of total)
- Jan FY25 data: Exports already down 2.4% YoY, even before tariff effect
- Cumulative risk (FY25): Up to ₹57,000 crore loss in export value
Inflation Outlook: Currency as Transmission Channel
- BoB currency-inflation modeling:
- 10% INR depreciation → +0.12–0.16% in WPI short-term
- Longer-term pass-through effect → +0.38–0.49%
- This suggests imported inflation risk via raw materials and capital goods, especially in sectors affected by dollar-denominated contracts.
Policy Response Matrix
- Monetary Policy:
- Elara Securities anticipates a 50 bps rate cut by RBI in FY26
- This implies policy is expected to lean accommodative despite global rate volatility
- Fiscal Posture:
- No revisions announced, but government may need to deploy export credit support, incentives, or targeted SME relief
Corporate & Financial Sector Implications
- Revenue Compression Risk:
- Export-facing firms may reduce prices to maintain competitiveness, compressing margins
- Banking Sector Sensitivity:
- SMEs in gems & jewelry, apparel, and electronics could face cash flow stress
- BoB flags need for enhanced monitoring of these borrower segments
Strategic Outlook
- Mitigation Options:
- Ministry of Commerce is reviewing strategic responses, including bilateral negotiations
- Medium-term response could involve diversifying export markets and strengthening FTA frameworks
- Structural Insight:
- India’s exposure to external tariff shocks is relatively contained, but its dependence on a few high-value sectors for U.S. exports amplifies the short-term pain.
The economic fallout from U.S. tariffs, while manageable in absolute macro terms, reveals India’s export vulnerability to bilateral frictions. Sectoral stress, especially among SMEs and dollar-sensitive exporters, could have knock-on effects on employment and credit quality. The policy mix will need to carefully balance external stability, growth support, and inflation management going into FY26.
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