Moneycontrol Pro Panorama | We are not OK, but we can be

Domestic markets have had mixed feelings and opinions on the impact of tariffs have ranged from manageable to catastrophic. We detailed what economists foresee in the post-tariff period in our Panorama yesterday and more opinions since then suggest that India’s manufacturers will be bruised but it is in the policymakers’ hands that they not be battered. Simply put, we have been dealt a blow, but we can do something about it.

Today we offer a reality check which is the first important starting point of doing something.

India is not an export-driven economy but more a domestic consumption-driven one. The share of exports in overall gross domestic product (GDP) is less than a third now and exports to the US are just 2 percent of GDP. A deceleration in exports would impact to that extent the headline GDP growth number for the current fiscal year.

That does not mean tariffs won’t hurt more. Where tariffs pinch are specific sectors that are labour intensive and therefore have a bearing on incomes and consumption. In short, if Americans stop buying our products, the earnings of a vast swathe of people get impacted and therefore their spending capacity. One such sector is the apparel and textiles industry. R Srinivasan explains in his column on the sector that tariffs will surely deal a blow. Nearly 60 percent of the sector’s output goes to US and European Union.

The impact on exports comes at a time of a cyclical slowdown in the economy. The telltale signs of these are already visible in companies’ quarterly performance. Beyond the seasonal impact, corporate earnings growth has disappointed markets this time. The outlook offered in the commentary of big companies has also been circumspect.

Most importantly, the flow of finance is getting slower. Bankers do not want to underwrite loans in a hurry, stress has now spread from unsecured retail loans to even small business loans. All these are early signs that companies, at least the small ones, aren’t able to generate enough profit. This eventually endangers incomes at the individual level and therefore consumption. As such, the narrative on employment has been sobering in the past many months. While the government’s newly minted employment data shows a reasonably low unemployment rate, stagnant rural wages and benign urban earnings have been dragging down consumption. Private consumption expenditure growth has been declining and the status of it in the first quarter of this year would be known only a month later.

Meanwhile, Manas Chakravarty notes that capex is afloat due to the government and the private sector is yet to make a meaningful contribution. What is concerning is that interest payments have surged 46.2 percent year-on-year in the first quarter of FY26. “It shows that the interest payments heavily constrain government spending, and underscores the growing burden of public debt, which limits fiscal flexibility,” Chakravarty notes.

The upshot is that India’s economy is in the throes of a slowdown, with all of its engines humming less. We are not OK.

But there are measures that can be taken to reduce the pain or at least help the economy deal with it. Firstly, sectors that are in the tariff firing line and are also employment intensive must be safeguarded. As Srinivasan notes in his piece on textiles, “Bangladesh, Vietnam, Philippines, even Sri Lanka are beating us on cost, while China is beating us on scale, integration with the US markets, and superior logistics.” The government must address the challenges of fragmentation, high finance and logistics costs in the apparel and textiles firms and come out with supportive measures.

With fiscal measures, monetary measures are also important. We examined here why the odds of a policy rate cut by the Reserve Bank of India (RBI) are strong given the impact of tariffs and the disinflation. Beyond the policy rates, the RBI can also ensure that flow of capital does not get affected and manage the exchange rate in a way that imports do not get costlier.

Trump’s tariffs will cause considerable discomfort on growth but both fiscal and monetary measures can reduce the same. We are not OK, but we can be.

Investing Insights

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Weekly tactical pick: This defence company is poised for strong revenue growth

Amber Q1FY26: After a quick rally, is there more steam left in the stock?

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Apple 'open to' AI acquisitions to accelerate roadmap, says Tim Cook

Markets

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Aparna Iyer Moneycontrol Pro