Morgan Stanley reflects on India's moderate exposure to US sectoral tariffs

Morgan Stanley reflects on India's moderate exposure to US sectoral tariffs

The US runs a sizable auto deficit of approximately $245 billion, including passenger vehicles, vehicles for goods transport, and auto parts (including EV batteries). Asia accounts for nearly half of this deficit, at around $115 billion, with Japan, Korea, and China being the primary contributors. Passenger vehicles are notably the largest product trade surplus item for both Japan ($39 billion) and Korea ($35 billion) with the US.

However, India's exposure to US sectoral tariffs is relatively moderate compared to other Asian economies, according to the latest Morgan Stanley report. The most significant exposure for India is in pharmaceutical products (2.8%), followed by agriculture and food (1.3%), and mineral fuels (0.7%), Morgan Stanley said in its latest report.

The vehicle sector's limited exposure (0.5%) suggests that India is at a relatively lower risk from the US autos deficit perspective, unlike economies like Japan and Korea that are more deeply impacted. Additionally, the absence of semiconductor exports from India implies minimal direct impact from potential tariffs on this sector, in contrast to major exporters like Taiwan and South Korea.

Morgan Stanley highlights that the ratio of goods exports to GDP is a critical metric, as it determines the trade orientation of economies. This metric considers factors like trade surplus with the US, tariff differentials, and non-tariff barriers. For economies like India and Japan, robust domestic demand acts as an offset, resulting in relatively lower ratios of goods exports to GDP.

"India and Japan — these economies have robust tailwinds from domestic demand strength as an offset and relatively lower ratios of goods exports to GDP," the Morgan Stanley report said.

India’s focused efforts to boost pharma exports and its strategic push towards becoming a global pharmacy make it particularly susceptible to any increase in tariffs on pharmaceutical products. However, the diversified nature of India’s export basket, coupled with the limited exposure to the US autos deficit, points to a relatively resilient position in the current global trade landscape.

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As the US considers sector-specific tariffs, India’s balanced export composition, driven by strong domestic demand, could help mitigate potential risks. The country's diversified approach, focusing on pharmaceuticals, agriculture, and mineral fuels, rather than heavy reliance on vehicles or semiconductors, reflects a strategic advantage compared to other Asian economies.

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