Secondary, tertiary effects of US tariffs on economy pose challenges: Finance Ministry report

New Delhi: The immediate impact of recent US tariffs on Indian exports may appear limited but their secondary and tertiary effects on the economy pose challenges that must be addressed, the finance ministry said in a report on Wednesday amid the US effecting a steep 50 per cent tariff on shipments from India.

Ongoing India-US trade negotiations are critical in addressing these issues including the secondary and tertiary effects of high tariff by the US on Indian goods, the monthly economic review released by the ministry said.

The steep 50 per cent tariff on Indian goods entering the US, which came into effect from August 27, would impact exports worth more than USD 48 billion. The sectors which would bear the brunt of the high import duties imposed by the Trump administration include textiles/ clothing, gems and jewellery, shrimp, leather and footwear, animal products, chemicals, and electrical and mechanical machinery.

"While the immediate impact of recent US tariffs on Indian exports may appear limited, their secondary and tertiary effects on the economy pose challenges that must be addressed. In this context, the ongoing India-US trade negotiations will be crucial," it said.

In line with the global shift towards diversification and strategic realignment, it said, India is actively pursuing a diversified trade strategy to sustain its resilient trade performance.

"This includes the recently concluded FTA with the UK and EFTA and ongoing FTA negotiations with the US, EU, New Zealand, Chile, and Peru. But, these initiatives will take time to show results and may not fully address the shortfall in exports to the US that may arise if the current tariff rates on India persist," it said.

Observing that India's economy stands at a critical juncture, the report said, its strong economic performance over the past few years, along with policy stability and high infrastructure investment, has earned it a sovereign rating upgrade by S&P from 'BBB-' to 'BBB'.

"This upgrade serves as a testament to the economy's robust macroeconomic fundamentals and ongoing reform initiatives. The assessment comes at a moment when the economy has exhibited considerable resilience in the face of global challenges, with strong domestic demand and prudent policy management contributing to economic stability," it said.

On the domestic front, the report said, aided by above-normal precipitation and better sowing of kharif crops, the headline inflation may remain moderate in the near term.

"An increased market arrival in Q1, comfortable buffer stocks and better output prospects, coupled with stable global oil markets, might keep the prices of food grain moderate. The downside risks to global growth are likely to keep international commodity prices in check, partly offsetting the impact of higher tariffs," it said.

To enhance economic growth amidst the challenging global landscape, the Prime Minister has announced a few initiatives focusing on policy reforms.

First, the creation of a Task Force for Next-Generation Reforms aims at further simplifying regulations, lowering compliance costs, and fostering a more enabling environment for startups, MSMEs, and entrepreneurs, it said, adding, the planned rollout of next-generation GST reforms in the coming months, with an emphasis on reducing the tax burden on essential items, is expected to provide direct relief to households and boost consumption demand.

Complementing these measures, the rating upgrade is anticipated to reduce the borrowing costs, attract greater foreign capital inflows, widen the access to global capital markets, boost disposable income, reduce inflationary pressures, cut input costs for businesses, and support growth, it said.

Amid global uncertainties, these government initiatives are charting a growth trajectory driven by long-term reforms that will boost disposable income, reduce inflationary pressures, and reduce costs for businesses, it said.

It further said that the government's focus on employment generation through schemes like the PM Viksit Bharat Rozgar Yojana, combined with reforms in the education sector and skill development initiatives, aims to create a workforce that is well-prepared for the demands of the changing world.

Taken together, these reform initiatives and the improved sovereign rating will underpin growth by encouraging investment, stimulating consumption, increasing employment opportunities and strengthening confidence in the economy's long-term trajectory, it added.