India's GDP could slow down to 6% in FY26 if US levies 50% tariff: Moody's

New Delhi: Moody's Ratings on Friday said India's GDP growth is likely to slow down by about 30 basis points to 6 per cent in the current fiscal if the US implements 50 per cent tariffs from August 27.

However, resilient domestic demand and the strength of the services sector will mitigate the strain on India, Moody's said, adding that India's response to high US tariffs will ultimately determine the effect on its growth, inflation and external position.

On August 6, the US announced an additional 25 per cent tariff on all Indian imports, in addition to an existing 25 per cent duty, taking the total duty to 50 per cent effective August 27.

The White House said the measure responds to India's continued purchase of Russian oil.

"Should India continue to procure Russian oil at the expense of the headline 50 per cent tariff rate on goods it ships to the US, which is currently its largest export destination, we project that real GDP growth may slow by around 0.3 percentage points compared with our current forecast of 6.3 per cent growth for fiscal 2025-26 (ending March 2026)," Moody's said.

The 50 per cent tariff on India compares with the 15-20 per cent duty for other Asia-Pacific countries.

India and the US have been negotiating a bilateral trade agreement (BTA) since March, with an aim to more than double the bilateral trade in goods and services to $500 billion by 2030 from the current $191 billion. So far, five rounds of talks have been completed.

For the sixth round, the US team is visiting India from August 25. They are aiming to conclude the first phase of the agreement by fall (October-November) this year. The two sides are also looking at an interim trade deal before the BTA.

Moody's said countries in Asia-Pacific are vying for a greater share of trade and investment flows amid a restructuring of supply chains triggered by US policy shifts.

"Beyond 2025, the much wider tariff gap compared with other Asia-Pacific countries would severely curtail India’s ambitions to develop its manufacturing sector, particularly in higher value-added sectors, such as electronics, and may even reverse some of the gains made in recent years in attracting related investments," Moody's said.

Since 2022, India has increasingly ramped up its crude oil imports from Russia as demand from the latter's traditional offtakers dried up amid sanctions tied to its invasion of Ukraine.

"India has been able to procure at least some of its purchases of Russian oil at below global prices, which has helped insulate India's inflation from the pass-through of global commodity price movements, while preempting pressures on its current account deficit," Moody's said.

India's imports of Russian crude rose to $56.8 billion in 2024 from $2.8 billion in 2021.

Moody's said India retains sufficient foreign-reserve currency buffers to weather external volatility.

"The magnitude of the drag on growth from tariff obstacles will influence the government's decision to pursue a fiscal policy response, although we anticipate the government will adhere to its focus on gradual fiscal and debt consolidation," said the US-based rating agency.