US reciprocal tariffs on India to have limited impact as economy domestically-driven: S&P

New Delhi: India will be less impacted by the proposed US reciprocal tariff as the country's economy is mainly driven by domestic demand, and has substantial services exports, which is not going to be targeted by the Trump Administration, S&P Global Ratings said on Wednesday.

US President Donald Trump has announced he will impose reciprocal tariffs on its trading partners, including India.

S&P Global Ratings, Economist Asia-Pacific, Vishrut Rana said the reciprocal tariff will hurt countries like Vietnam, South Korea, Taiwan more as they have high trade surplus with the US.

The Indian economy has two mitigating factors -- greater reliance on domestic economy and larger services trade with the US, which is not likely to be tariffed.

In Japan also, there are similar mitigating factors -- greater reliance on services trade, and domestically-driven economy.

"... which means (US) trade measures might be less impactful there (India and Japan)," Rana said at the S&P Asia-Pacific Credit Focus webinar.

He also said that reciprocal tariffs may fuel inflationary expectations, thus leading to higher interest rates globally.

S&P Global Ratings, Director, Sovereigns (Asia-Pacific) YeeFarn Phua also said India's economy is largely still domestic-oriented and the nature of the exports to the US is more on the services side, which is less prone to tariffs.

"India's dependence on exports for growth is not that great. So, therefore, I think the impact (of US tariffs) will be more or less limited," he said, adding on the goods side the sectors which could be exposed to higher tariffs are jewellery, pharmaceutical, textiles and chemicals.

Phua said the US may not impose higher tariffs on pharmaceuticals, which are basically generic drugs, from India as it would drive up healthcare costs in its own country.

However, textiles and to some extent chemicals are most at risk of higher tariffs.

"If we were to reimagine that scenario for the first Trump administration to unfold again, I think overall, the impact on India should be quite minimal," Phua added.

Earlier in 2018 under the Presidency of Donald Trump, Washington had imposed an additional 25 per cent import duty on steel products and 10 per cent on certain aluminium products. In retaliation, India in June 2019, imposed additional customs duties on 28 American products.

More than five years after the initial tariffs were imposed, on July 3, 2023, the US removed tariffs on steel and aluminium imports from India.

With regard to economic growth in India, Phua said India will clock a 6.7-6.8 per cent GDP growth over the next two years. These growth rates, even though slower than before, continue to place India above sovereign peers at similar income levels, and "we do believe that this will continue to support fiscal revenue growth despite the income tax cuts." He said fiscal 2025-26 budget will boost growth for the next few years, largely by domestic demand through tax cuts for households and GDP growth is now normalising to a more "sustainable level".

"The government remains very much focused on investment-led growth and also on agriculture sector reforms. However, we do think that economic expansion in India is startling to normalise towards a more sustainable level after real growth had averaged 8.3 per cent over the last three years post-pandemic," Phua said.

As per official projections, the Indian economy will grow at 6.4 per cent in the current fiscal (2024-25), lower than 8.2 per cent in 2023-24.

S&P Global Ratings has a 'BBB-' rating on India, which is the lowest investment grade. The outlook on the rating was positive, from stable, in May 2024.

He further said India's fiscal metrics continue to be quite positive and the tax revenue to GDP has grown over the last few years to around 12 per cent currently.

The central government deficit has been lower since the pandemic years.

S&P believes that the government will meet its fiscal deficit target of 4.8 per cent and 4.4 per cent for the current and the next fiscal, respectively.

"These targets actually are quite consistent with our projections... We do believe that the government will meet the deficit targets, largely because there are continued large dividends coming from the central bank, as well as potential capex under-spending on the expenditure side," Phua said.