India Must Watch Out for GDP Growth

With every passing day, the outcome of the global tariff war grows harder to predict.

- Rajeshwari Sengupta

One thing is clear, though—it will have significant repercussions for India. Policymakers must find ways to limit the damage to growth—and explore how to turn this setback into an opportunity.

It may be tempting to dismiss the tariff war, given India's predominantly domestically driven economy. Exports to the US make up only 2.3 percent of gross domestic product (GDP), and even that may overstate their impact, as products like iPhones that India sends to the US have low domestic value added. Additionally, not all exports would be adversely affected even if the US imposes a 26 percent tariff. In fact, some analysts believe the impact will be limited, since the tariff proposed for India is lower than those envisaged for China, Vietnam, or Bangladesh—potentially giving India a competitive edge.

This optimism is misplaced. India's supposed competitive edge may never materialize because other Asian countries could negotiate lower tariffs with the US. It also seems likely that Canada and Mexico will keep their preferential access to the US. This implies that if Indian exports do end up facing a 26 percent tariff, exporters like auto parts manufacturers, who compete with Canadian and Mexican producers, will likely lose significant ground in the US market.