The U.S. Tariff Game: How Will Indian Economy get impacted?
Navigating a New Era of Trade Relations
Negotiation is a fact of life. You bargain with your employer over a salary increase. You work out a deal with a homeowner on the price of their property or rent. Two lawyers hash out a divorce settlement. A consortium of oil firms collaborates on a shared offshore drilling project. The U.S. Secretary of Commerce meets with their Indian counterpart to hammer out a tariff agreement. Each of these scenarios, diverse as they are, represents the art and necessity of negotiation—a process where differing interests converge in pursuit of mutual understanding.
In the coming days, you will read a lot of about Smoot-Hawley. We wrote about it 2 months back. But, this post in not about US, its about US (India).
The Genesis of the Tariffs: A Move Towards Reciprocity
Trump's administration has declared a national emergency citing unfair foreign trade and economic practices. The "America First Trade Policy" reports conducted by various US government bodies provided the rationale for this tariff action, highlighting foreign trade barriers.
The core principle underpinning this action is reciprocity, the idea that other countries should treat the US in the same way the US treats them in terms of trade barriers.
India faces a reciprocal tariff of 26%, which is noted to be relatively lower than that imposed on most other countries. This figure is benchmarked against the US Trade Representative's (USTR) estimated 52% tariff and non-tariff measures imposed by India.
What is for us?
It is widely anticipated to have large negative consequences for global and US GDP growth and to fuel global and US inflation. Under various scenarios of exports to the US being impacted, the decline in India's exports could range from 0.2% to 10%, leading to a 5 to 100 basis points decline in GDP growth.
Sector-Specific Impacts: Winners and Losers (Potentially)
The impact of the US reciprocal tariffs will be uneven across different sectors of the Indian economy, depending on their exposure to the US market and the nature of the tariffs imposed.
Automobiles & Components: This sector faces a "tariff shock" for global auto suppliers. The US has imposed a 25% tariff on imported cars/light trucks and select auto parts sourced from outside North America, effective from April 3 for vehicles and May 3 for components.
While the US has also imposed a 26% reciprocal tariff on India, it will not be additive to the already announced 25% tariffs on vehicles/parts imported into the US market.
India's direct exports of passenger vehicles and commercial vehicles to the US are relatively small.
However, Indian auto component makers have a more significant exposure to the US market, estimated at around 3.5% of their annual revenue. This limited exposure will somewhat shield their revenue.
The tariffs could lead to increased car prices in the US, potentially causing a steep decline in the US car market.
Margins of Indian auto suppliers with US exposure could come under pressure as they might need to partially absorb the cost pressures, diminishing their low-cost advantage versus North American suppliers.
Companies with higher exposure to the US market through exports from India are expected to be more affected:
Tata Motors: Could see a significant impact on its Jaguar Land Rover (JLR) business due to potential negative implications on overall USA sales and EU OEMs exporting to the USA. EPS cuts for the JLR business could be around 15-20%.
Sona Comstar: Derives a significant portion (40-43%) of its revenues from the USA. Tariffs on auto components could lead to a substantial impact on their profitability and EPS.
Bharat Forge: Has a significant revenue exposure to the USA (24-30% from exports). Tariffs on auto components could severely impact their margins, leading to a mid-teens impact on overall EPS.
Balkrishna Industries, Timken, and CEAT: These companies have a notable portion of their revenues from the USA (15-18%, 11-13%, and 6-9% respectively), which will be impacted by tariffs on auto components.
Motherson Sumi Systems: Expected to have a low direct impact due to local plants in the USA, but potential negative implications on overall USA sales could indirectly affect revenues.
Other companies like M&M and Eicher Motors may experience marginal impacts.
Mexico and Canada, benefiting from preferential treatment under the USMCA, are expected to see a benefit as their competitiveness increases in the US market.
Pharmaceuticals: The pharma sector has been temporarily exempted from the higher reciprocal tariffs announced by the US. This provides a temporary relief, but the overhang of potential sector-specific tariffs remains.
The key question now is the duration of this exemption. Media reports suggest the US is evaluating sector-specific tariffs on pharmaceuticals.
If a hypothetical 26% tariff were levied on Indian pharma companies (similar to country-specific tariffs), the impact could be varied across different segments.
Generic formulations and biosimilars with high US EBITDA contribution would face significant earnings impact. It might be difficult to pass on higher tariffs for biosimilars compared to generics due to lower US dependency on India for the former.
Specialty portfolios (like that of Sun Pharmaceuticals) could also be impacted as existing higher price points might make it challenging to pass on increased costs. However, limited substitutes for some specialty products could act as a safeguard.
Innovator-focused Contract Research and Manufacturing Organizations (CRDMOs) might be able to partially pass on tariffs to their clients.
In the event of pharma tariffs, companies with high US sales as a percentage of overall sales and high US EBITDA contribution would experience the most substantial impact on their EBITDA and profit after tax (PAT).
Some Indian pharma companies have commented on the potential tariffs:
Aurobindo Pharma: Believes it is well-prepared due to its plants in the US (Dayton and Puerto Rico).
Biocon: Expects an impact on biosimilars but believes generics tariffs might be passed on.
Cipla: If tariffs are in the range of 5-10%, they might be manageable. Investments in US facilities are expected to de-risk their model.
Glenmark Pharma: Views tariffs as detrimental for generics due to existing price erosion in the US market.
Lupin: Warns that tariffs could impact the US generic industry, causing product disruptions and drug shortages. They hope for an exemption but are exploring mitigation strategies like US manufacturing and cost efficiencies.
Natco Pharma: Is considering acquisitions in the US to establish front-end manufacturing.
Sun Pharmaceuticals: Expects most tariffs to be passed on to customers and believes India's long-term competitive advantage will persist.
Torrent Pharmaceuticals: Anticipates a negative impact if 25% tariffs are imposed and awaits further policy details.
Zydus Lifesciences: Will evaluate each product's margin and believes manufacturers cannot solely bear the 25% tariff, potentially leading to higher prices or shortages.
The US relies significantly on India for its generics supplies (around 45% by volume) and a notable portion of biosimilars (10-15% by volume). Many top generics prescribed in the US lack a US API (Active Pharmaceutical Ingredient) source.
The value of the US generics market is relatively small compared to the overall US pharma market, suggesting the value impact of Indian generics might be lower.
If pharma reciprocity is strictly followed, considering India's lower import duty on US pharma compared to the US's zero duty on Indian drugs, the impact on India might be manageable.
Engineering Goods, Chemicals, and Gems & Jewelry: It is expected to be among the worst impacted by the uniform 26% reciprocal tariff on India's exports to the US.
Companies in these sectors with a meaningful portion of their revenues from the US market will likely face a large negative impact on their profitability and possibly volumes.
It is doubtful that companies will be able to significantly change or reroute exports, forcing them to absorb a decent portion of the higher tariffs.
Second-order price competition among exporters to the US and other countries is anticipated as global trading patterns adjust to high US tariffs.
Specifically:
Chemicals: Sectors like Navin Fluorine, PI Industries, SRF, and UPL with US revenue exposure will be negatively impacted by the 27% tariff.
Gems and Jewelry: Will face a relatively larger increase in tariffs.
Textiles: Home textile companies such as Welspun Living, Trident, Himmatsingka, and Indocount have a high direct revenue exposure to the US (40-60%) and are expected to be negatively impacted. Fabric and yarn companies will also be affected indirectly.
IT Services: The IT services sector is expected to have no direct impact from the tariffs. However, there could be indirect impacts from a slower US GDP growth due to the higher tariffs, potentially affecting demand from certain verticals like Manufacturing, Logistics, and Retail. Demand from sectors like Healthcare, Hi-tech, Utilities, and Communications is expected to be less impacted.
Potential Countermeasures and Negotiations
Negotiations with the U.S. will be pivotal in determining the tariff game’s outcome. As a process rather than a showdown, these talks offer India an opportunity to mitigate damage and secure concessions. To succeed, India must first decode the U.S.’s goals and motives, then align its own interests accordingly.
Understanding U.S. Objectives
The U.S. likely aims to:
Reduce Trade Deficits: India enjoys a trade surplus with the U.S., exporting more than it imports. The tariff may be a lever to narrow this gap.
Protect Domestic Industries: Sectors like chemicals and electronics, where India competes, overlap with U.S. efforts to reshore manufacturing.
Extract Market Access: The U.S. has long sought greater entry into India’s agricultural, dairy, and tech markets, often stymied by high tariffs and non-tariff barriers.
India’s Response Options
Lower Tariffs and Barriers: India could offer to reduce tariffs on U.S. imports in targeted sectors—alcoholic beverages, automobiles, and farm products like almonds and pork—where American producers have a strong interest. Non-tariff barriers, such as stringent quality standards or surcharges, could also be eased to signal goodwill.
Sectoral Trade-offs: India might push to exempt additional sectors (e.g., textiles, IT services) from U.S. tariffs in exchange for concessions elsewhere. Highlighting pharmaceuticals’ tariff-free status as a model could strengthen this case.
Strategic Alignment: Leveraging the U.S.-India geopolitical partnership—especially in technology (e.g., semiconductors) and defense—could soften trade tensions. Joint initiatives, like co-production of critical goods, might offset tariff impacts.
Diversification Push: Beyond negotiations, India must accelerate efforts to diversify export markets (e.g., Africa, Latin America) and boost domestic manufacturing to reduce U.S. dependency.
Endnote
The U.S.’s 26% tariff on Indian exports marks a moment in a broader negotiation game, not a final verdict. While the near-term impact on India’s exports—sparing pharmaceuticals but pressuring chemicals, electronics, and gems—may be tempered, the medium-term risks of retaliatory tariffs and a global trade slowdown loom large. The coming months will test India’s diplomatic and economic agility, with the outcome shaping its place in a rapidly changing world order. Also, India’s ability to align interests with the U.S., safeguarding growth, jobs, and stability in an increasingly protectionist world.