How India Can Navigate the Tariff Shock

The answer lies in assessing the impact through both a cyclical and strategic lens

- SONAL VARMA

It's now official. The International Monetary Fund's latest outlook confirms that global growth is likely to decline, with risks skewed to the downside. A tariff-driven stagflationary shock for the United States and a demand shock for the rest of the world are likely ahead.

What does this mean for India, and how should we position ourselves? The answer lies in assessing the impact through both a cyclical and a strategic lens.

The Cyclical Lens

The immediate impact is negative for growth. India's ultimate exposure to the US—its direct exports to the US, and its value added in other countries' exports to the US—is around 2 percent of gross domestic product (GDP). The direct growth impact from sectoral and reciprocal tariffs is likely to be around 0.2 to 0.3 percentage points.

The impact varies across export products, depending on the price elasticity of demand and the ability to substitute. For example, gems and jewellery exports are vulnerable, as they are driven by discretionary demand, while the burden of auto tariffs could be shared between exporters, US-based firms, and consumers.

There are also indirect effects to consider. Uncertainty and weak global demand will further delay private investments. Information technology (IT) services exports will be hit due to slower discretionary spending. The deterioration in confidence, tighter financial conditions, and slower job and income growth will also weigh on overall demand.

There are some positive offsets. Near-term trade diversion is likely in sectors like electronics. Lower commodity prices will ease input cost pressures and improve the terms of trade. Above-normal monsoons and lower inflation are positives for rural consumption. All considered, though, the negatives will dominate. While consensus expects GDP growth in the 6.2–6.5 percent range in FY26, this seems optimistic; we expect 5.8 percent.