Immediate impact of US tariff seen limited, but lag effect needs action: FinMin

New Delhi: The finance ministry has cautioned that while the immediate impact of the latest US tariffs on Indian exports appears limited, the lagged effect needs to be addressed as it could weigh on trade and growth, according to its July monthly economic review released Wednesday.

The review said the government’s strategy of reforms—ranging from simplification of the goods and services tax (GST) to measures that cut business costs—along with a sovereign ratings upgrade and an above-normal monsoon, would support growth and ease the tariff-related pain.

The government’s economic strategy entails reforms that will boost disposable income, reduce inflationary pressures, and lower costs for businesses, said the review by the department of economic affairs in the ministry.

Government and the private sector can together minimize the tariff-induced disruption and if the near-term economic pain is absorbed more by those who have the ability and the financial strength to do so, then the small and medium enterprises downstream will also emerge stronger from the trade imbroglio, the review said, adding that the reforms will make India a globally competitive, resilient economy.

Citing India’s oil trade with Russia—which is waging a war against Ukraine—the US imposed additional tariffs on Indian exports from Wednesday. The total applicable tariff is now 50%, one of the highest worldwide.

The economic review cautioned that the tariff shock, geopolitical tensions, and supply chain disruptions have significantly affected global trade dynamics.

The impact of these tariffs are still emerging, and they are expected to have a dampening effect on global trade in the latter half of 2025 and throughout 2026, the review said, highlighting a World Trade Organization forecast that world merchandise trade is projected to grow 0.9% in 2025, significantly lower than the 2.7% estimate before the US tariff hikes.

“While near-term risks to economic activity, principally exports and capital formation, remain due to tariff-related uncertainties, the government and the private sector, acting in tandem and concert, can keep the disruptions to a minimum. Setbacks eventually make us stronger and more agile, if handled properly,” the review said.

The global trade uncertainty has an ongoing impact on business confidence, investment and supply chains, the review said, referring to an increase in the Trade Policy and Uncertainty Index in July.

“Given the importance of the US market for India’s goods exports and the tariff rates that would apply to a significant portion of India’s merchandise exports to the US, India would face these effects, unless the uncertainty is resolved soon, resulting in lower duties,” the review said. The ongoing negotiations with the US for a trade deal are crucial, it added.

On Tuesday, ratings agency Crisil said in an analysis that the 50%US tariffputs India at a distinct disadvantage compared with competing nations like China, Bangladesh and Vietnam, and that readymade garment exports to the world’s largest market will face a steep decline if the tariffs hold.

The government is currently trying to unlock the full potential of the economy by governance and regulatory reforms that will boost the country’s ease of doing business and investment climate.

In his Independence Day speech on 15 August, Prime Minister Narendra Modi announced reforms in the GST regime that will simplify indirect taxes, while delivering a consumption stimulus. GST reforms in the coming months, with an emphasis on reducing the tax burden on essential items, is expected to provide direct relief to households and boost consumption demand, the review noted.

Another positive for the country is the recent upgrade of India’s sovereign rating to ‘BBB’ by S&P, a move that is expected to reduce borrowing costs, attract greater foreign capital inflows, widen the access to global capital markets, boost disposable income, reduce inflationary pressures, cut input costs for businesses, and support growth, the ministry said.

“Taken together, these reform initiatives and the improved sovereign rating will underpin growth by encouraging investment, stimulating consumption, increasing employment opportunities and strengthening confidence in the economy’s long-term trajectory,” the review said.

Industry representatives sounded confident of sailing through the uncertainty.

“The 50% US tariff is undoubtedly a challenge, but Indian industry has always thrived under pressure,” said Sanjay Nayar, president of industry body ASSOCHAM. “Our businesses have a proven track record of adapting quickly, innovating and expanding into new frontiers. Exporters across textiles, gems and jewellery, agriculture and shrimps face steep duties, yet they are accelerating diversification into Africa, Latin America, Europe and ASEAN, while strengthening competitiveness at home,” Nayar said.

The statistics ministry is slated to give an update on GDP growth in the June quarter later this week. The Reserve Bank of India expects the economy to grow at 6.5% in the current fiscal year.