The stock market collapses in Asia and Europe on Monday – an aftermath of Donald Trump’s sweeping tariffs and China’s counter-tariff retaliation to it – revived memories of similar market turmoil after the COVID-19 pandemic and the last global financial crisis. Analysts called the falls "historic" and some even described it as a "bloodbath", recalling previous collapses since the start of the last century.
Major indices around the world have dipped into negative territory, with Hong Kong’s Hang Seng index experiencing the most significant fallout. Indian benchmark indices, including the Sensex and Nifty, were heavily impacted by the global market downturn, with intraday declines of up to 4 percent.
Global trade is becoming more uncertain with countries putting up more barriers. While India isn't the main target, it’s still feeling the impact of the major tariffs recently announced by the United States.
However, despite the 26% reciprocal tariff presenting a tangible headwind for India, the government has expressed optimism about maintaining a robust growth rate of 6.3-6.8 per cent for the fiscal year 2025-26, provided that global oil prices remain below $70 per barrel, as reported by Reuters, quoting government officials.
Notably, the Economic Survey project had in January this year projected the same growth rate (6.3-6.8 per cent) for 2025-26 on the back of a “strong external account, calibrated fiscal consolidation and stable private consumption”. It had also stated that domestic growth levers will be more crucial than external ones in the coming years for the Indian economy.
Factors contributing to India’s economic resilience
Several factors mitigate the severity of this direct impact of tariffs on India. Let’s take a look at some of them:
• While the US is an important trading partner, the share of India's exports in its overall GDP is relatively small. This reduces the potential macroeconomic impact from tariffs levied by one particular country.
• A substantial portion of India’s economic activity is driven by domestic consumption, which insulates the economy from external shocks to some extent. A growing middle class and increased urbanization are driving higher demand for goods and services, keeping the economy strong despite changes in international demand.
• Government spending on infrastructure development, social programs, and rural upliftment further bolsters domestic demand, creating a significant buffer against external shocks.
• A growing services sector, encompassing IT, telecommunications, finance, and retail, contributes significantly to GDP and is largely driven by domestic consumption.
• India has prioritized diplomatic engagement over retaliation in response to US tariffs and is pursuing trade negotiations with it. Meanwhile, India is focusing on strengthening bilateral trade agreements with other key partners and exploring new markets in regions like ASEAN, Africa, Latin America, and the European Union to diversify its export destinations and reduce over-reliance on the US market.
• The ongoing trade tensions, particularly between China and the US, may pave way for India to emerge as an attractive alternative manufacturing and sourcing hub for companies to diversify their operations away from countries high US tariffs.
• The Reserve Bank of India (RBI) plays a crucial role in managing inflation and supporting growth. While navigating global uncertainties, the RBI may consider monetary policy adjustments, such as interest rate cuts, to stimulate domestic demand and investment if the tariff situation poses a significant threat to economic momentum.
Impact of tariffs on India and challenges ahead
1. The tariff will undoubtedly make Indian exports to the US expensive, potentially leading to a decrease in their demand and market share in key sectors like diamonds, textiles, and certain agricultural products.
2. Reduced exports to a major trading partner like the US could negatively impact India's overall trade balance.
3. The escalation of trade tensions has raised concerns about a global economic slowdown, which could indirectly affect India's growth by dampening external demand and investment flows.
4. The depreciation of the Indian rupee in response to trade tensions poses risks related to imported inflation and external debt servicing. The RBI's interventions in the foreign exchange market and monetary policy adjustments will play a vital role in managing currency stability.
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