The Reserve Bank has warned the adverse impacts on the economy from the ongoing trade war with the US, which has slapped a 50% tariffs on domestic goods shipped to that country with ready-mades, polished diamonds, shrimps and leather goods being the worst hit sectors, but the positive impact of the drastic cuts in goods and services tax rates will cushion the overall economy.
The GST rate cuts are expected to boost domestic demand and output, which may mitigate the adverse impact of the US tariffs, the RBI said in its October bulletin.
The analysts of the bulletin article describe the US tariffs as a “supply-side shock”, which will have more adverse impact on the US rather than its trading partners.
“In the US, higher tariffs are likely to function as a supply-side shock, gradually passing through to consumer prices and pushing inflation higher in the latter half of 2025. In contrast, higher tariffs are expected to dampen export demand and thereby exert downward pressure on inflation in other regions,” the bulletin said.
The full impact of the higher tariffs—25 percent standard duties on all goods from August 7 and an additional 25 percent penal charges on all goods for New Delhi buying the partly discounted Russian oil from August 27, takes the applicable duties on Indian goods shipped to the US bearing the highest tariffs along with Brazilian shipments. The has seen the exports to the US, which has been the largest market four us, falling 20.3 percent in the September to $5.5 billion from August, marking the fourth consecutive monthly decline and erasing over $3.3 billion in monthly trade since May, according to a report from GTRI and is the first month after the 50% duties were in place.
Since the trade was began in April (but put off to July) exports to the US have been steadily falling– from $8.8 billion in May which was the last month of growth, to $8.3 billion in June (–5.7%), to $8 billion in July (-3.6%), and further down to $6.9 billion in August (–13.8%), and finally to $5.5 billion in September, down a steep –20.3%), according to GTRI data. And the worst hit sectors are textiles, gems & jewellery, engineering goods, shrimps and chemicals.
However, despite this, overall exports rose to $36.38 billion in September from $35.10 billion in August. But imports also surged; led by gold and silver which rallied close over 60 percent and 72 percent so far this year, jumped to $68.53 billion, a steep rise from $61.59 billion in August, leading to a $32.15 billion trade deficit.
Exports to non-US markets grew 10.9% on-year, outpacing the 6.6% growth in August. Overall, the exports in September grew by 6.7% on an annual basis to $36.38 billion.
“The prevailing higher US tariffs, unless resolved, could reduce the country’s merchandise exports to their largest export destination, adversely impacting net external demand,” the bulletin, published Monday, said.
“However, the recent structural reforms, including the implementation of GST 2.0, are expected to boost domestic demand and output, which may mitigate the adverse impact of US tariffs,” the central bank analysts said. The views in the bulletin are not the official position of the RBI, though.
The bulletin goes on to underline that the economy “has displayed resilience” amidst broader global uncertainty and weak external demand with both trade and economic policy “uncertainties increasing in September”.
The bulletin also pointed towards the steeply falling retail inflation that fell to a 99-month low of 1.54 percent in September. However, it warned that the headline inflation is expected to edge up in the second half of the fiscal due to unfavourable base effect and the GST rate cuts, which are expected to boost consumption.
Stating that despite all these external negatives, the economy has been steadily holding out with record low inflation and strong balance sheets of corporates and banks.
“The economy has demonstrated resilience despite global uncertainty and weak external demand, supported by strong and durable macroeconomic fundamentals, the article on the ‘state of the economy’ said highlighting the strengthening growth momentum, with signs of revival in urban demand and robust rural consumption.
“While the economy is not immune to global headwinds, it has so far exhibited resilience, driven by a focus on strong and durable macroeconomic fundamentals, including low inflation, robust balance sheets of banks and corporates, adequate foreign exchange reserves and a credible monetary and fiscal framework,” the article said.
“Domestic structural reforms especially the GST rate cuts are helping to somewhat offset the drag on growth from the weakening external demand conditions,” the article concludes.
