Tariffs weigh on India’s growth outlook despite tax relief: ING

Investing.com -- India’s growth outlook is under renewed strain as steep U.S. tariffs threaten to offset recent domestic tax relief, ING said in a  recent report. 

The brokerage flagged that while cuts in the Goods and Services Tax (GST) may provide some cushion, “a lack of meaningful export diversification suggests the drag on growth will be significant.”

President Donald Trump’s decision to impose 50% tariffs on Indian imports took effect ten days ago, including a 25% penalty tied to India’s continued oil purchases from Russia. 

The U.S. accounts for 21% of India’s exports, with auto parts, iron, steel and aluminum among the hardest hit. ING estimated the effective tariff rate at 33%.

On paper, the direct impact looks moderate, since India’s $87 billion in exports to the U.S. in FY2025 represent less than 2% of GDP. 

Adjusted for tariff-free sectors such as pharmaceuticals and electronics, the direct output hit is expected at 0.6-0.7% of GDP. 

But ING cautioned that the “impact would be much larger given the second-round impact on employment and consumption,” particularly in labor-intensive industries such as textiles, leather and jewelry.

Trade diversification in Asia remains limited. Exports to the region have dropped from more than one-third in 2018 to 28% in 2024, while exports to the U.S. and Europe have increased. 

ING noted that India’s 2010 free trade pact with ASEAN “never took off,” as high compliance costs discouraged exporters from using it.

India also faces a delicate balance on Russian oil imports. Russia remains the country’s largest supplier, and halting purchases could backfire. 

ING estimated that removing Russian crude from India’s import basket could drive Brent oil to $71 per barrel in 2026, costing 0.7% of GDP and adding 0.7 percentage points to inflation.

Recent GST reforms could soften the tariff blow. The government cut taxes on essential items, small vehicles and electronics, while raising the rate on luxury goods to 40%. 

ING said the changes are “projected to lift consumption by 0.1-0.2% of GDP – providing a timely boost to economic growth” at a modest fiscal cost of 0.16% of GDP.

The tariff shock is expected to be deflationary, with CPI inflation likely to fall below 3%. ING said this “strengthens our case for another 50bp Repo rate cut by the RBI over the next six months,” with the central bank possibly front-loading easing in the fourth quarter. 

The rupee has already fallen more than 3% this quarter, and ING warned that “a prolonged export slowdown could structurally weaken India’s current account balance.”