Daily Voice: Nifty’s single-digit earnings to cap rally; US tariffs to squeeze textiles, jewellery but pharma safe

Further, following a period of rally, which started post Covid, a slowdown in the market was expected given the increased Nifty valuations over the last couple of years. However, if we look at the performance of the last 5 years, India has outperformed most of the other emerging markets, and is likely to deliver stable returns once the earnings re-rating sets in.

In the near-term period, Indian markets are expected to move sideways and as the earnings of Nifty companies are expected to grow in single digits in FY26, a rally in the Indian equity markets seems unlikely in the short term.

Are further GST-like reforms needed to support sectors impacted by tariffs and to boost overall economic growth?

While the US government’s tariffs on India have kicked in, the exact impact of these tariffs are yet to be seen. Given that there is little trade among the countries, and India’s trade with US is approximately only 2% of India’s GDP, the impact of these tariffs is not expected to be highly significant.

However, given that the US has been a critical strategic partner for India, it is expected that the government of India will take the rightful steps needed to mellow down the tariff situation. These steps would include engaging with the US counterparts to reach an agreement on the tariff imposition, diversifying its business with varied trading partners and becoming more self-reliant to minimize the impact of such uncertainties, if they transpire in the future.

In your view, could there be significant earnings downgrades if the trade deal is delayed by a year?

While India’s trade with US might be limited to approximately only 2% of India’s GDP, there are critical sectors like textiles and diamond & jewellery that are likely to face challenges in the short term. The US is the largest importer, picking up almost 29% of India's total textile and apparel exports. With US being the largest export market for the country's apparel industry and exporters now grappling with order cancellations, the 50% tariffs imposed by the US are likely to impact India's textile exports in the coming 6 months.

Another labour-intensive sector that could face the earnings downgrade pressure could be the diamond and jewellery space. In 2024-25, India's gems and jewellery export to the world was approximately $13 billion, which included an export of approximately $5 billion to the US alone. This means that the US accounted for almost 40% of India’s gems and jewellery export market. This new tariff will increase the prices of these products in the US, eventually adversely affecting the sector.

Do you strongly believe that the US will refrain from imposing tariffs on the Indian pharmaceutical sector?

Given the significant reliance of US on Indian generic drug medication, the Indian Pharma industry has been exempted from 50% tariffs imposed by the US. Healthcare is a critical sector for US, and almost half of its generic medications are imported from India, thereby making India a crucial partner for US to have cost effective medicines. This dependence stems from India's advantage in low-cost manufacturing, which makes producing drugs in the US substantially more expensive.

So, an imposition of tariffs on the pharma sector will adversely affect the US healthcare space. While potential tariffs and trade tensions pose risks, the US healthcare system's heavy reliance on these affordable imports makes immediate, substantial tariffs unlikely.

Do you think high US tariffs could negatively impact FDI inflows into India?

While the tariff imposition could have a sudden knee jerk reaction affecting the FDI inflows in India, this reaction is expected to be only short-term in nature and is likely to reverse in the long-term. Institutional investors are capitalist in nature and are always on the lookout for the right growth investment opportunities globally. If these investors find value in the growth of Indian companies, the FDI investments are expected to flow in, irrespective of the tariff imposition.

India is looking to become a cost-effective manufacturing hub for products ranging from electronics to semiconductors by promoting favourable business environment, skilled workforce and diversified resources. Timely execution of these steps is likely to attract global attention and investments to India.

Given that labour-intensive sectors are likely to bear the brunt of tariff-related disruptions, and considering that the overall tariff impact is estimated at around 1% of GDP, do you expect the government to announce significant labour reforms?

Almost 70% of India’s goods exports to the US is exposed to the new 50% tariff. While this is only 7% - 8% of the country’s total exports, the blow is concentrated in labour-intensive sectors like textiles and apparel, gems and jewellery, auto parts and agricultural products, all of which directly impact employment and farmer livelihoods.

To withstand these tariffs, the Indian government has pledged to safeguard its industries, reduce taxes & push for self-reliance to protect itself from the US tariff imposition. The government will also aim to streamline existing labour laws to improve ease of doing business and improve worker protection for labour intensive sectors which are likely to bear the immediate brunt of tariffs. The government will also be looking to diversify its trading relations with multiple partners to reduce the reliance on any single country.

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