The United States’ proposed reciprocal tariffs on India’s exports are expected to have only a minimal impact, according to the State Bank of India (SBI).
Despite concerns about the potential effects of these tariffs, SBI’s report suggests that the overall impact on India’s exports to the US would be limited, with the expected tariff increase falling between 15 pc and 20 pc.
This means the overall reduction in exports would be only around 3 pc to 3.5 pc, a relatively small impact when compared to the broader market discussions.
The proposal by the US to impose reciprocal tariffs, framed under the "Fair & Reciprocal Plan," aims to correct what the US perceives as longstanding imbalances in international trade.
However, SBI points out that this move might provide collateral benefits to India through enhanced cooperation in various sectors. These include defence, energy security, technology, critical minerals, maritime security, investments, and higher education.
The diplomatic and trade negotiations between the two countries have the potential to foster a positive, dynamic environment that could benefit India beyond the initial tariff adjustments.
India has shown flexibility in its negotiations with the US, which is expected to help reduce the overall increase in tariffs. This will further limit the impact of the reciprocal tariffs on Indian exports.
By diversifying its export base, India aims to mitigate the negative consequences. The country has been expanding its export sectors, focusing on both manufacturing and services.
Additionally, India has sought to explore new markets and establish alternative trade routes that pass through Europe and the Middle East, effectively redrawing the global supply chain algorithms. This diversification strategy is expected to cushion the impact of the new tariffs.
The impact of the reciprocal tariffs is not uniform across all sectors. As per SBI’s analysis, different sectors will face varying levels of impact based on their respective trade elasticities.
While some industries may experience a more pronounced effect, others might be less affected due to the adaptability of the Indian economy. India has also strategically repositioned itself by making incremental tariff adjustments over the years.
This has allowed for a more dynamic approach to international trade, especially with the US.
The US tariff rate on Indian goods rose from 2.72 pc in 2018 to 3.91 pc in 2021. Similarly, India’s tariffs on US imports have increased from 11.59 pc in 2018 to 15.3 pc in 2022.
Despite the increase in tariffs, the impact on trade has remained relatively stable due to ongoing adjustments in both countries' economic and trade policies.
To further cushion the effects of the tariff hikes, Indian exporters have used strategies such as advance payments, Foreign Currency Non-Resident (FCNR) loans, and proceeds from other financial obligations, which are often deposited in Export Earners’ Foreign Currency (EEFC) accounts.
These measures are designed to protect Indian exporters from the fluctuations in exchange rates, helping them absorb some of the negative effects of the tariffs.
India also faces non-tariff barriers, which have been highlighted in reports by Nomura. These non-tariff barriers, which include restrictions on imports, customs barriers, and various domestic regulations, are seen as obstacles to trade between India and the US.
Nomura points out that India ranks high in non-tariff barriers, alongside China, due to factors such as the opaque nature of quantitative import restrictions, the challenging process of obtaining import licenses for certain goods, and price controls on medical devices.
These measures often create additional hurdles for international trade, further complicating the relationship between the two countries.
The US has also expressed concerns about India’s non-tariff barriers, citing issues such as agricultural subsidies that distort markets, mandatory domestic testing and certification requirements, and regulations surrounding alcoholic beverages.
These barriers are part of a wider range of trade restrictions that the US views as detrimental to fair trade.
In terms of retaliatory measures, the US is not alone in using non-tariff barriers. Other countries such as Japan, Australia, the Philippines, and South Korea have also utilised various sanitary and phytosanitary measures to counter trade imbalances.
These measures, although non-tariff in nature, are still significant obstacles to trade, and countries like India must navigate them in their trade relations with the US.
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