According to a Morgan Stanley report released on Thursday, US President Donald Trump announced an additional 25% tariff on India, bringing the total tariffs to 50% effective from August 27. This makes the sixth round of India-US negotiations to reach an interim trade deal, currently scheduled for August 25, crucial.
“Export growth and domestic demand data for spillover impact, along with any incremental policy response,” the paper said.
India exported $86.5 billion worth of goods to the US in FY25, or 2.2% of its entire GDP. 67% of India’s exports to the US are subject to both the initial 25% tariff and the extra penalty, totaling $58 billion, or 1.5% of GDP (the remaining industries are under section 232).
Inferences from the input-output table that our worldwide team has modelled are used to evaluate the effect of tariffs on India’s GDP.
Over the course of a year, the direct impact on GDP is probably going to be 60 basis points, and the indirect impact might be comparable, assuming that all exports of goods are subject to a 50 percent tariff rate.
According to the research, a comparable sensitivity analysis for the 67% of non-exempted goods indicates that the direct impact may be 40 bps, and the indirect impact may be of the same size, bringing the overall impact to 80 bps.
The sensitivity analysis ignores mitigating factors like export market diversification and/or domestic policy response and refers to the linear impact of an external demand shock.
In terms of monetary policy, we anticipate that the RBI will continue to ease interest rates, possibly implementing two more rate cuts of 25 basis points each, in addition to the 25 basis point rate cut that we have penciled in for our base scenario. In order to boost domestic demand, the central government is also expected to halt budget consolidation and maybe permit an increase in capital spending, according to the article.
“We will keep a careful eye on high frequency growth data and geopolitical happenings. It will be crucial to monitor the sixth round of trade talks between the US and India, which are currently scheduled for August 25. Along with any additional policy reaction, we will keep a careful eye on statistics on domestic demand and export growth for any spillover effects,” it continued.
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