India’s trade resilience against US tariffs

[WORLD] A 10% tariff on all Indian items entering the United States is far lower than a 26% import tax. Sure. However, the prospect of reimposing the higher figure on India persists. U.S. President Donald Trump initially shattered the old international trading system by declaring global "reciprocal" tariffs earlier this month, but then reversed course on Wednesday, returning to a 10% import tax rate on practically all countries.

While this may provide some respite in the short term, India still has the opportunity to negotiate a free trade agreement with the US. However, unlike other growing Asian countries that are heavily reliant on exports, economists believe India's consumer-led economy provides it a stronger negotiating position with the United States.

India’s domestic consumption accounts for nearly 60% of its GDP, a stark contrast to export-heavy economies like China and Vietnam. This structural advantage allows New Delhi to negotiate from a position of relative strength, as it is less dependent on external demand to sustain growth. Analysts suggest this could embolden Indian negotiators to resist pressure for sweeping concessions, particularly in sensitive sectors like agriculture and dairy, where local political considerations often outweigh trade benefits.

According to World Bank figures, exports of products (including non-tariff services) will account for almost one-fifth of India's GDP in 2023. Meanwhile, developing market competitors such as Thailand and Vietnam reported exports of 65% and 87% of GDP, respectively.

While the United States would apply tariffs on goods imports, which account for 56.1% of India's total exports, services have yet to be targeted. Some of India's greatest companies, such as TCS and Infosys, are unlikely to be directly hit by the tariffs, and may only be indirectly affected if the global economy slows, given that the majority of their clientele are headquartered overseas.

The resilience of India’s IT services sector, which contributes nearly 8% to GDP and employs over 5 million people, further insulates the economy from tariff shocks. Unlike manufacturing, which faces tangible barriers, services trade relies on digital infrastructure and skilled labor—areas where India retains a competitive edge. However, any future U.S. scrutiny of visa policies or digital service taxes could reintroduce risks for the sector.

India's merchandise export destinations are likewise very diverse, with the United States accounting for only 18% of shipments in 2023-2024, according to India's Ministry of Commerce & Industry.

"The structure of trade from India to the United States is very different than, say, China, because of the services component," said James Sullivan, head of Asia Pacific stock research at JPMorgan. "The U.S. administration is almost entirely focused on trade in goods, not trade in services, where the U.S. actually has a surplus."

“If that narrative starts to shift, we have to recognise that the large majority of Indian exports to the United States are I.T. services,” Sullivan added. “Those stocks have taken a significant hit due to the risk of a recession in the United States, and the lack of corporate expenditure that would then hit the I.T. services topline.”

While India has some advantages, the task before Indian negotiators is likely to be made more difficult by competitors facing a much worse condition.

The geopolitical landscape adds another layer of complexity. India’s strategic alignment with the U.S. in countering China’s influence in the Indo-Pacific could provide leverage in trade discussions. Washington may weigh economic demands against broader security partnerships, potentially softening its stance on tariffs. However, this dynamic also means India must tread carefully to avoid appearing overly reliant on geopolitical goodwill to secure trade concessions.

China now faces a total tariff rate of 125% (as of this type), while Vietnam fears being reimposed with 46%'reciprocal' import duties—among the highest rates the US has imposed. Their economic fragility, as exports to the United States account for a significant portion of GDP, has resulted in divergent responses. While China has decided to retaliate with countermeasures, Vietnam has offered to eliminate all tariffs, potentially opening the door to a free trade agreement with the United States.

“Just had a very productive call with To Lam, General Secretary of the Communist Party of Vietnam, who told me that Vietnam wants to cut their Tariffs down to ZERO if they are able to make an agreement with the U.S.”, Trump posted on social media websites Truth Social and X soon after unveiling his tariff program.

Treasury Secretary Scott Bessent, who is leading the trade negotiations, confirmed on Wednesday that he will be meeting with Vietnamese trade officials that day. Vietnam had proactively promised to reduce tariffs on agricultural and energy imports from the United States. After the tariffs were announced, it pledged to purchase aerospace, defense, and security products from the United States.

The point is that Vietnam is going all out on tariffs and wants free trade. However, the measure may encourage other countries to compete by providing the United States even better trade conditions.

In the short run, while Apple is apparently intending to send additional made-in-India iPhones to the United States to counter China's high tariffs, Cupertino officials may also consider whether zero tariffs in Vietnam—if an agreement is reached—might be a better bet than India.

It is natural for businesses to believe that while 26% tariffs on India are preferable than 125% tariffs on China, 0% tariffs on Vietnam are even better. And that school of thought won't be limited to California.

Sourcenext Corp, a Japanese electronics manufacturer, revealed plans this week to establish a new factory in Vietnam after its present site in China became impracticable for exports to the United States.

At first look, all of this may appear to imperil India's existing comparatively advantageous relationship with the United States.

"Although India wants to have their own solution to manufacturing industries, it [the US-Vietnam deal] will undoubtedly have an impact on its [negotiations] with the US," Mark Martyrossian, a director at Aubrey Capital. And keep in mind that the bully is always more forgiving of those who give in to his charm sooner. Those who stay longer have him licking his chops.

Aubrey's global emerging markets fund allocates 32% to China and 30% to India.

Far from a race to the bottom to decrease tariffs, Martyrossian believes India has leverage in negotiations with the United States, citing the fact that merchandise exports are for a small fraction of India's overall economy. This means that Indian trade negotiators engaging with the United States are unlikely to have the authority to make broad concessions akin to Vietnam.

Others agree.

“The situation on tariffs is still evolving, but India is relatively well-placed due to its low merchandise export dependence and therefore may have some flexibility in working out its eventual position,” said Abhiram Eleswarapu, head of India equities at BNP Paribas. “Most sectors in India derive less than 10% of their revenue from exports to the U.S. with the exception of IT services and Pharmaceuticals.”

“India will not compromise on certain areas like agriculture, and is therefore in a better bargaining position,” said Gaurav Narain, principal advisor at the London-listed India Capital Growth Fund.

“My own sense is that India will try and offset the negative trade balance … by committing to higher imports in areas like oil / defence etc. However, it could lower tariffs to 0% in many areas like pharmaceuticals and autos, where India already has a very well developed, low-cost manufacturing base, and imports would only be of premium products.”

Narain noted that, even in the near run, the tariffs will have a "limited impact" on India because supply networks are difficult to adjust, as demonstrated by the instance of Apple. "I believe corporations will use a long-term, structural strategy to de-risking their supply networks. India has the advantage of not being regarded as merely a detour from China, which benefits it," Narain said.

For investors in Indian stocks, the market has been less accommodating. Aside from the tariff upheaval rattling markets, Indian stocks are still deemed overly expensive due to their exorbitant valuations.

“Earnings estimates still need a reset lower,” said Aditya Suresh, head of India equity research, at Macquarie Capital. “We believe the worst is behind and we could see inflows in the coming months.” Suresh also recommended that investors may avoid the current instability by investing in firms that generate most of their revenue locally, rather than large-cap exporters. Until the dust settles, the Macquarie analyst believes Bharti Airtel, GAIL, and UltraTech Cement are better investments.