Will India’s Economic Growth Slow Down Due to 50% US Tariffs?

India’s economy, one of the fastest-growing in the world, has started showing early signs of moderation as it entered the first quarter of FY 2025/26. According to a Reuters poll, India’s GDP growth likely slowed to 6.7% year-on-year in April–June, compared to 7.4% in the previous quarter. While domestic demand and government spending have offered some cushion, external pressures, particularly the 50% US tariffs on Indian exports, are raising concerns about growth prospects in the coming quarters.

India’s Growth Momentum Slows

The moderation in Q1 reflects weak urban demand, sluggish private investment, and uncertainty in exports. Economists remain cautiously optimistic, but acknowledge the risks posed by tightening global trade conditions. India, while resilient compared to many peers, is navigating a complex environment of domestic challenges and external shocks.

US Tariffs Put Exports and Jobs Under Pressure

The biggest external headwind comes from the United States, which recently doubled tariffs on Indian goods to 50%, citing India’s purchase of Russian oil. This move places India among the most heavily taxed US trading partners, alongside Brazil.

Economists warn that these tariffs could disproportionately affect labour-intensive industries, such as:

• Textiles and garments

• Footwear and leather

• Jewellery and gems

• Chemicals and processed food

HSBC’s chief economist, Pranjul Bhandari, estimates that if tariffs remain for a full year, India’s GDP growth could decline by 0.7 percentage points. More importantly, such measures could hurt job creation in export-oriented sectors, undermining India’s status as an attractive alternative to China for global manufacturing.

Domestic Resilience: Monsoon and Government Spending

Despite these pressures, several factors have supported India’s economy in Q1:

• Strong monsoon rains have bolstered rural demand, particularly in agriculture and FMCG consumption.

• Robust government spending on infrastructure and welfare schemes has partly offset sluggish private investment.

• Easing food inflation, which fell to a multi-year low of 1.55% in July, has lifted household purchasing power.

Additionally, front-loaded exports ahead of the tariff hike provided temporary relief. These buffers have helped India sustain relatively strong growth, even as nominal GDP growth has softened to 8% from nearly 11% in previous quarters.

Cautious Corporate and Private Sector Environment

Corporate data suggests a slowdown in momentum. According to the Reserve Bank of India (RBI), annual sales growth of 1,736 listed private manufacturing firms eased to 5.3% in Q1, down from 6.6% in the prior quarter.

Factors behind this caution include:

• Muted urban consumer demand

• Lower business sentiment

• Higher input costs

• Global economic uncertainty

While larger firms with diversified markets may manage better, smaller export-oriented SMEs are particularly vulnerable, as they rely heavily on US demand. This poses risks for employment and wage growth in these labour-intensive sectors.

Policy Response and Countermeasures

To counter external shocks, the government has announced several steps:

• GST cuts on essential goods to reduce household costs and boost consumption.

• S&P Global’s recent ratings upgrade, which could lower borrowing costs and attract foreign capital.

• Ongoing infrastructure investments aimed at sustaining long-term demand.

The RBI still projects India’s full-year GDP growth at 6.5%, underscoring confidence in the country’s strong domestic fundamentals despite global trade headwinds.

What Lies Ahead?

The April–June quarter highlights the delicate balance India must maintain between domestic resilience and external vulnerabilities. While monsoons, policy support, and government spending have cushioned growth, prolonged US tariffs could slow exports and investment flows, limiting growth potential.

Key risks for the coming quarters include:

• The sustainability of labour-intensive exports

• The pace of private investment recovery

• US-India trade negotiations and tariff developments

• Shifts in consumer sentiment and inflation

For now, India’s economy remains on a growth path but faces a tightrope walk. Policymakers, investors, and businesses will be closely monitoring how global trade tensions evolve and how effectively India adapts its strategy to sustain growth momentum.

Conclusion

India’s Q1 growth slowdown, combined with the imposition of steep US tariffs, underscores the challenges of navigating an uncertain global economy. While the country continues to outperform most major economies, vulnerabilities in exports and employment remain. The coming months will test India’s ability to leverage domestic demand, attract investment, and protect its most vulnerable sectors while staying on track for its ambitious growth targets.