The US has recently imposed new tariffs on Indian goods, raising concerns over trade competitiveness. Yet India’s economy is largely domestically driven, with exports to the US representing only a small share of GDP.
While textiles may face pressure, most key export categories remain resilient.
Tariffs
Since early August, US president Donald Trump has introduced a 25% tariff on India, as well as an additional 25% penalty related to India's energy trade with Russia.
Although the imposition of tariffs has understandably generated concerns regarding potential effects on economic growth, we would like to highlight that India remains a largely domestically driven economy, with relatively low trade intensity compared to other emerging markets. Exports to the US ($87bn in 2025) represent approximately 2% of India’s GDP.
India’s principal export categories to the US comprise electronics, gems and jewellery, textiles, and pharmaceutical products. At present, both electronics and pharma exports remain exempt from tariffs.
Gems and jewellery exports represent a highly specialised and labour-intensive industry with limited credible substitutes globally. Consequently, the incidence of higher tariffs is expected to be partly transferred to end buyers.
However, India’s textile and apparel exporters are likely to encounter greater competitive pressures, as the tariff rates applicable to them are higher relative to those imposed on peer exporters from Bangladesh, Pakistan, and Turkey.
Outside the merchandise goods category, it is worth noting that the largest export from India to the US is software services ($100bn), which is currently not within the ambit of tariff discussions globally, as the US runs a services trade surplus with the rest of the world.
From an equity market perspective, the direct impact of tariffs could be more muted than believed considering only 1.4% of MSCI India IMI revenue is subject to tariff risk.
It is likely that this set of tariff announcements on India is an opening salvo in a trade negotiation process. Ultimately tariffs could settle down at more reasonable levels, in-line with other trading partners (~15-25%), mirroring the negotiation pattern with EU.
Further, domestic policy support to mitigate the relative disadvantage in sectors such as textiles cannot be ruled out.
Macro outlook
Beyond the recent tariffs, macroeconomic fundamentals remain robust, as demonstrated by S&P's recent upgrade of India's sovereign credit rating from 'BBB-' to 'BBB'. This action follows S&P's adjustment of India's outlook to positive in May 2024.
The upgrade is attributed to three main factors: improved fiscal management through higher-quality government spending, strong economic growth and stable monetary policy.
Additionally, S&P noted that the overall impact of US tariffs imposed on India is expected to be marginal and unlikely to undermine India's long-term growth trajectory.
The government has also proposed a simplified goods and services tax (GST) structure with fewer tax slabs, which is likely to improve compliance, boost efficiency and increase the size of the formal sector.
Overall, various measures such as monetary easing, income tax cuts, and a reduction in GST rates are likely to support near-term economic growth.
Over the long term, India is projected to be the fastest-growing major economy in the world and, according to estimates by leading global agencies, will be the third-largest economy by 2030.
Favourable demographics, superior corporate profitability and megatrends of digitalisation and formalisation, complemented by policy reforms, remain the structural drivers of India’s growth.
However, what remains the most attractive aspect of investing in India is the opportunity to generate outsized alpha. One of the reasons for the alpha opportunity is that India still remains a highly under-researched market and hence very inefficient. This makes it a fertile ground for bottom-up stock pickers.
While there are strong opportunities across the market capitalisation spectrum, India has a vast, heterogeneous mid-cap and SMID-cap segment, which is typically even less well researched and hence more inefficient, thereby providing strong alpha generation potential.
Ayush Abhijeet is an investment director of the Ashoka India Equity Investment Trust. The views expressed above should not be taken as investment advice.