After the US imposed a cumulative 50% tariff on Indian goods, Himanshu Kohli, Co-founder of Client Associates, warned that a higher terminal tariff rate could dent India’s GDP growth by 40–100 basis points.
However, he expects India’s growth to pick up in H2 FY25, supported by the lagged impact of easing financial conditions and the consumption boost from the FY26 Union Budget — a trend he believes will set the stage for a recovery in corporate earnings in H2 FY26.
He also anticipates that domestically focused sectors will remain relatively resilient, helping offset the pressure on export-oriented industries facing trade uncertainty.
What is your interpretation of the RBI's monetary policy decision and its commentary, especially in light of the rising risks associated with potential Trump-era tariffs?
The RBI's August policy decision reflects a prudent balancing act in an uncertain global macro backdrop. Though the central bank maintained a status quo on policy rates, it revised its inflation forecast lower while highlighting growth concerns on potential external headwinds. While it expects inflation to undershoot in the near term (2.1% for Q2 FY26), it projects it to rise higher in the coming quarters (4.9% for Q1 FY27). This explains the central bank cautious approach in this review while retaining the flexibility to act should growth concerns emerge.
Do you strongly believe that India will remain largely unaffected, despite Trump's threats to impose higher tariffs?
Indian economy is largely domestic oriented, and consumption driven which makes it relatively insulated compared to export heavy Asian peers. India’s total merchandise exports to the US accounts for approximately 2.2% of its GDP and 18% of total exports. However, a higher terminal tariff rate could result in a 40-100bps potential impact on India’s GDP growth rate.
Do you foresee a sharp slowdown in economic growth in the second half of FY26, given the trends in GST collections, auto sales data, and corporate earnings?
We expect India’s growth to continue to recover in H2 FY25 driven by the lagged impact of easing financial conditions and consumption boost provided in the Union budget of FY26. This bodes well for recovery in corporate earnings in H2 FY26. Earnings delivery, though muted in recent quarters appear to have bottomed out. An improved domestic macro backdrop bodes well for earnings growth recovery. We expect domestic focused sectors to be relatively resilient and offset the impact on external focused sectors exposed to trade uncertainty.
Do you think US business will be severely impacted in the coming months, particularly due to the proposed Trump tariff hikes?
The baseline tariff of 15% against key allies is significantly higher than the previously anticipated 10% base rate. According to Yale Budget Lab, after accounting for consumption shifts, average US tariff rate could rise to 17.5% which is the highest since 1934. Additionally, the short-run consumer prices may rise by 1.8% and the US real GDP growth may get cut by 0.5% each in 2025 & 2026.
We anticipate that the US businesses are likely to get impacted in the coming months due to tariff hikes as higher cost of finished goods and intermediate inputs used in manufacturing directly impacts business margins and consumer prices. This combined with potential supply chain impact, reduced business investment on account of uncertainty, and weakening consumer sentiment could lead to economic headwinds.
While the immediate impact has been muted due to front-loading of shipments and firms absorbing higher costs, this strategy is not sustainable over time. Research confirms that the burden may eventually fall on US businesses and consumers. The Fed held interest rates steady in its recent policy on account of potential inflationary concerns amidst weakening labour market, resisting political pressure to cut even as it revised down the GDP growth estimates for the year.
After negotiations, do you expect the final US tariff rate for India to be below 15 percent?
The situation remains fluid. There was a further escalation in tariff on Wednesday with an announcement of additional 25% duty on shipments arriving from August 28. India’s stated objective to protect its national interest raises the possibility of negotiations extending further into H2 2025 increasing near term risks. However, in our base case, we still see tariff rates settling below the current rate (25% effective August 7), but not without significant escalation in rhetoric.
Do you think Trump will threaten to impose tariffs but ultimately exclude pharmaceutical & electronic goods?
Both these sectors so far have been kept outside the purview of tariffs. US has a large dependence on Indian generics and API imports for affordable healthcare. Also, there are close interlinkages between the two countries on the electronics manufacturing segment. Hence, while Trump has mentioned that he may impose tariffs on these sectors, we expect that these two sectors may still continue to remain out of the ambit of tariff to maintain supply chain stability and healthcare needs. However, given the evolving situation and unpredictable nature of Trump’s policy announcements, it is difficult to completely rule out any possibility in future.
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