India's economy likely slowed in April-June ahead of US tariff blow
News Summary
India's economy likely slowed to 6.7% year-on-year growth in the April-June quarter of fiscal 2025/26, down from 7.4% in the preceding three months, according to a Reuters poll of economists. This deceleration is primarily attributed to weak urban demand and sluggish private investment. Despite this, India remains one of the fastest-growing major economies, with the central bank projecting full-year growth near 6.5% and anticipating a "minimal impact" from higher tariffs. Simultaneously, the United States on Wednesday doubled tariffs on Indian goods to as high as 50%, citing New Delhi's purchases of Russian oil. This punitive measure, on par with Brazil, is expected by economists to hurt India's growth and jobs in the coming quarters, particularly impacting key exports such as textiles, footwear, chemicals, and food items. HSBC's chief economist, Pranjul Bhandari, warns that if these elevated tariffs persist for a year, India's GDP growth could slide by 0.7 percentage points. While real GDP growth holds steady, JPMorgan anticipates nominal GDP growth (which includes inflation) has softened to 8% from an average of nearly 11% over the past eight quarters, potentially weighing on government tax revenues and corporate profits. In response to the tariff threat, the Indian government has pledged support for affected sectors and plans tax cuts on essential goods and services to boost domestic consumption. Furthermore, S&P Global's recent ratings upgrade is expected to lower borrowing costs and attract foreign capital.
Background
India's economy is recognized for its rapid growth within the global landscape, aiming to become the world's third-largest economy. However, its growth has consistently faced structural challenges, including fluctuating consumer demand and insufficient private investment. The Trump administration in the U.S. has pursued an "America First" protectionist trade policy, implementing tariffs against various trading partners, often citing trade imbalances, national security, or geopolitical considerations. India's continued purchase of Russian oil in 2025 has drawn Washington's attention, leading to further U.S. trade sanctions. Previous sanctions have typically been imposed to penalize countries perceived as harming U.S. economic interests or not aligning with its alliance policies.
In-Depth AI Insights
What are the true strategic motivations behind the Trump administration's increased tariffs on India? Beyond merely punishing India for its Russian oil purchases, the Trump administration's tariffs likely serve multiple strategic objectives beyond simple trade penalties: - Geopolitical Pressure: To compel India to align more definitively with the U.S. in the great power competition involving China and Russia, reducing its reliance on Russian energy and weakening Russia's geopolitical and economic influence. - Domestic Political Gains: To appeal to segments of the electorate, particularly in the run-up to the upcoming midterm elections in the U.S., by demonstrating a tough stance on trade partners, thereby garnering political support for the "America First" agenda. - Supply Chain Reshaping: To use tariffs as leverage to accelerate the "de-risking" of global supply chains, encouraging the reshoring of critical industries to the U.S. or redirecting them to more U.S.-aligned countries, even if it temporarily diminishes India's appeal as an alternative manufacturing hub to China. How will India likely respond to these escalating trade and geopolitical pressures? India is unlikely to capitulate entirely to U.S. pressure and will likely pursue a multi-pronged strategy to safeguard its strategic autonomy and economic interests: - Diversification of Trade Partners: Actively seeking trade and investment collaborations with other economies like the EU, Japan, and ASEAN, reducing over-reliance on a single market (the U.S.), especially for tariff-affected export sectors. - Stimulating Domestic Demand: Implementing fiscal measures such as tax cuts and public spending to boost domestic consumption and investment, thereby offsetting the negative impact of slowing exports, which is particularly critical in the current environment. - Strategic Industry Support: Providing targeted subsidies, tax incentives, or technological upgrade support to labor-intensive export sectors (e.g., textiles, jewelry) severely impacted by tariffs, helping them improve competitiveness or pivot towards the domestic market. - Diplomatic Engagement: Actively engaging in communication and negotiation with the U.S. in international multilateral forums and bilateral dialogues, seeking tariff exemptions or reductions while emphasizing the importance of its independent foreign policy. What are the long-term implications of these tariffs for global supply chain restructuring and the emerging market investment landscape? The long-term implications of U.S. tariffs on India extend beyond bilateral trade, profoundly affecting the evolution of global supply chains and the attractiveness of emerging markets for investment: - Complicating "China+1" Strategies: India has long been viewed as a potential alternative to Chinese manufacturing, but U.S. tariffs will diminish its attractiveness, forcing companies seeking supply chain diversification to re-evaluate India's risk-reward profile and potentially look towards other emerging markets like Vietnam or Mexico. - Increased Regionalization and Nearshoring: Multinational corporations may increasingly favor relocating production to geographically closer countries with lower geopolitical risks, mitigating the shocks from long-distance transportation and geopolitical uncertainties, such as Mexico within the NAFTA region or Eastern European countries near the EU. - Emerging Market Differentiation: Emerging markets that can effectively balance great power relations, maintain policy stability, and offer attractive business environments will stand out. Countries with excessive geopolitical alignment or dependency may face greater economic volatility risks, leading to a more dispersed and cautious flow of capital.