India is still riding high as the world’s fastest growing major economy—at least as long as you’re ignoring the warning lights flashing towards a slowdown. Following peaking at 9.2% in the fiscal year 2023-24, growth has suddenly plummeted. What’s going to make this rift even worse is an imminent increase in tariffs on Indian exports to the United States. As of Wednesday, these tariffs will increase by as much as 27%. Now economists are sounding the alarm. They argue that these tariffs, resulting from the trade war initiated by former President Trump, could severely depress India’s fostered economic growth.
Fears about a global recession are increasing, with Wall Street bank JP Morgan putting the probability at 60%. Moody’s, the ratings agency, has sounded the alarm saying that the odds of a global recession have nearly doubled. They’ve skyrocketed from 15% to 35%, much of which is due to recent tariffs. The Reserve Bank of India (RBI) has already begun to respond to this economic turbulence with aggressive actions. This is the second cut since February, including a recent reduction in repo rates from 6.25% to 6%. This shift in monetary policy from “neutral” to “accommodative” aims to stimulate a slowing economy, but the government’s ability to counteract the effects of Trump’s tariffs remains limited.
At first glance, the affect of these tariffs haven’t hit India as hard as they have other countries. Indian tariffs on US goods go up to 150%, but max out at 27%. This stands in sharp contrast to China’s sky-high 104% tariffs and 46% and 49% tariffs on Vietnam and Cambodia, respectively. In turn, China reacted by imposing a punitive 34% tariff on US exports. In response, Europe is considering its own counter-measures against the United States.
After a period of relatively rosy headlines, recent reports have suggested that all is not well with India’s economic indicators. According to HSBC, “spending and tax revenues have lost steam in recent months,” signifying a weakening fiscal environment as external pressures mount.
RBI governor Sanjay Malhotra expressed concerns regarding trade frictions that are beginning to unsettle the global community, saying that “the outcome will also be influenced by how other countries retaliate or negotiate with the US on tariffs.” What’s more, India is applying smart solutions to these challenges—often in unprecedented ways. To prevent further losses, the country is being much more careful and concentrating on finishing finalizing a trade agreement with the US.
As India navigates this complex landscape, analysts from ICICI Bank have suggested that “the magnitude of rate cuts in the cycle now could be as high as 100bps (1%),” indicating that monetary policy adjustments will likely continue as the country strives to sustain its growth trajectory.