S&P Global Ratings stated on Wednesday that the impact of US reciprocal tariffs on India would be minimal, as the country’s economy is largely driven by domestic demand rather than exports. According to YeeFarn Phua, Director of Sovereigns and International Public Finance Ratings for Asia-Pacific at S&P Global, India's GDP is expected to grow by 6.7-6.8% over the next two years. He highlighted that the budget for the 2025-26 fiscal year would further support economic growth, primarily through tax cuts aimed at boosting domestic consumption.

He noted that while the government remains focused on investment-led growth and agricultural reforms, India’s economic expansion is gradually stabilizing after an average growth of 8.3% over the past three years following the pandemic. Phua expects consumer spending and public investments to sustain real GDP growth at around 6.7-6.8%, keeping India ahead of other economies with similar income levels. Despite income tax reductions, this growth is projected to support fiscal revenue. The Indian government estimates GDP growth at 6.4% for the current fiscal year (2024-25), lower than the 8.2% recorded in 2023-24. S&P Global currently rates India at 'BBB-', the lowest investment-grade rating, but upgraded its outlook from stable to positive in May 2024.

Phua also pointed out that India’s fiscal indicators remain strong, with tax revenue as a percentage of GDP increasing to around 12%. The fiscal deficit has been improving since the pandemic, and S&P believes the government will achieve its deficit targets of 4.8% for the current fiscal year and 4.4% for the next. He acknowledged concerns about potential revenue loss due to higher income tax exemption thresholds and slower economic growth but noted that large dividends from the central bank and possible underspending on capital expenditure could help the government stay on track.

Regarding US tariffs, Phua emphasized that India’s economy is not highly dependent on exports, with most of its trade with the US focused on services, which are less affected by tariffs. While some sectors, such as jewellery, pharmaceuticals, textiles, and chemicals, could face higher tariffs, he believes the impact will be limited. He also noted that the US is unlikely to impose tariffs on Indian pharmaceutical exports, particularly generic drugs, as it could increase healthcare costs in the US. However, textiles and certain chemicals may be more vulnerable to higher duties.

Reflecting on past trade tensions, Phua recalled that under Donald Trump's administration in 2018, the US had imposed additional tariffs on steel and aluminium imports, prompting India to respond with higher duties on 28 American products in 2019. However, in July 2023, the US removed tariffs on steel and aluminium imports from India. If a similar trade policy were to return, Phua believes the overall impact on India would still be relatively minor.

Disclaimer: This image is taken from PTI.