First, two high-ticket Indian exports were left untouched: IT Services, which does not fall under goods-specific imports, and second, pharmaceutical products, which are not discretionary in nature, were for the time being put on an exempted list of sectors.
The direct impact from tariffs would likely be limited on India, considering about 80% of the Indian economy is domestic oriented. Plus, tariffs are expected to bite the hardest around US discretionary spending, where India does not have a significant enough presence to be materially affected. Moreover, Indian goods exports to the US comprise just 2% of India’s GDP.
However, India could be affected by second-order impact in several ways. First, a potential weakening of the US environment over time due to the tariffs could affect corporate decisions around IT spending. This, in turn, could potentially translate into a medium-term impact on Indian IT Services. In addition, India is not immune to the supply chain disruptions that are likely to be caused by these tariffs should they go into effect at the end of the negotiation period.
India’s long-established strategic ties with the United States have endured plenty, from the Cold War-era distrust to estrangement over India’s nuclear programme. More recently, however, the US has pushed for strategic cooperation between the two countries across a wide spectrum, from economy to trade, from technology to defence, and more.
Bilateral trade agreement
Earlier this year, Prime Minister Narendra Modi met with President Trump at the White House. The two countries subsequently announced plans to more than double the US-India bilateral trade from an estimated US$130 billion in 2024 to US$500 billion by 2030. Negotiations are also ongoing for a bilateral trade agreement covering a wide range of issues, including deepening supply chain integration. India’s strategic value to the US could manifest in other ways too, including more US foreign direct investments into India, better market access to the US, and lower tariffs on Indian exports to the United States.
Hence, we think India should be able to safely navigate the tariffs through negotiation instead of any tit-for-tat measures. While sentiment is likely to remain negative in the near term, we would expect this to be mitigated as the macro picture improves. The Indian government and the central bank are taking steps to address the recent weakness in the economy whilst the corporate sector remains relatively healthy.
The risk lies in two areas first, a potential US recession could trigger a global economic downturn. Second, India could potentially get caught in the crossfire of an international trade war if the reciprocal tariffs do go into effect. In such instances, we would expect domestic-focused quality companies to do better and for our portfolio’s downside to be well protected.
Important information
Risk factors you should consider prior to investing:
- The value of investments and the income from them can fall and investors may get back less than the amount invested.
- Past performance is not a guide to future results.
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