The US decision to double tariffs on Indian goods, raising the total duty to 50% (effective August 27), has thrown a new challenge at the Indian economy. According to a Morgan Stanley report, the move could shave off as much as 80 basis points from India’s GDP growth over the next 12 months, unless it is offset by government action, policies and reforms.

The tariffs, effective 21 days after the announcement, are aimed at penalising India for continuing oil imports from Russia. They now apply to nearly 67% of India’s exports to the US, a chunk worth over $58 billion, or about 1.5% of India’s GDP.

While goods already in transit and cleared by US customs before September 17 will be exempt, the impact will start to bite shortly thereafter.

What’s at stake for India?
Sectors such as electronics, pharmaceuticals, textiles, gems and jewelry, and transport equipment-- major contributors to India’s export basket-- now face steep barriers in one of their largest markets. As per the report, the seafood industry alone may lose Rs 24,000 crore, and textile exporters are already halting US-bound production due to lost cost competitiveness against Vietnam and Bangladesh.

Morgan Stanley estimated that if tariffs on all Indian goods remain at 50%, the direct impact could be 60 basis points, with indirect effects pushing the total hit to growth to 1.2 percentage points. "A similar sensitivity analysis for the 67% of non-exempted goods suggests that the direct impact could be 40 bps while the indirect impact could be of a same magnitude, taking the total impact to 80 bps," the report added.
If tariffs remain elevated for a year, Morgan Stanley expects Indian policymakers to respond. The RBI may cut rates by up to 75 basis points, including a 50 bps beyond its current base case, to further cushion the domestic demand. Fiscal consolidation could also take a backseat as the government increases capital expenditure to offset export weakness.
These latest tariffs raise fresh questions about India’s trade dependencies and the urgency of diversifying export destinations and fast-tracking trade agreements, especially with emerging markets.