Chief Economic Advisor (CEA) V Anantha Nageswaran has said that while the economic impact of the US tariffs will be significant, but manageable, in the immediate term, there is a high possibility of a “larger” effect, which may result in a major risk for the Indian economy. In a recent interview, he explained that the GDP growth will be trimmed by 0.5-0.6 per cent in this financial year. But if there is no deal between India and the US, and the 50 per cent tariff spills into the next financial year, the cost will be bigger. It is evident that despite the GST cuts, India cannot sleep peacefully.
For the moment, the CEA feels comfortable with the Government’s growth forecast of 6.3-6.8 per cent in 2025-26. During the year, the American duties will be adequately countered by the GST cuts, higher-than-expected growth of 7.8 per cent in the April-June quarter, a higher-than-expected dividend payout by the central, which many categorise as “bumper,” and the ongoing sale of the Government’s assets. According to the CEA, the reductions in consumption and direct taxes, coupled with low inflation, are “key tailwinds” for the economy, which will propel it forward. But once the winds lose their speeds by the beginning of 2026-27, they may turn their direction, and start hurting where it pains the most.
Several key indicators may go for a six in the next fiscal year. Current account deficit will increase if exports are hit, Indian businesses are unable to find alternate markets, and the import bill goes up as the discounts on Russian oil dwindle to less than a dollar. According to several studies, the differential between Russian oil, and from other sources, has dropped from a high $9 a barrel (accounting for additional costs related to insurance and logistics) to $1 now. In addition, Indian petroproducts, which will be refined from Russian oil, are likely to face European sanctions. This will further dent exports, if the measures are strict and stringent.
Fiscal deficit, which may be under control in 2025-26, and not cross the Union Budget estimate of 4.4 per cent of GDP, may veer out of control the next year. This is serious as it will impact inflation, and Government’s borrowings, as also influence some of the spendings on the central welfare schemes. Given that there are several elections in the States, the Centre may be uncomfortable with such a scenario. Foreign exchange reserves may be under pressure, due to loss of exports and higher imports in terms of value, especially if the foreign institutional investors continue to take money out of Indian equities.
In fact, the only reliefs that are possible may come from America. Its Federal Reserve may decide to cut interest rates, which will force its investors to seek high-returns in the emerging markets. Any relief on American tariffs on Indian goods, or positive movement in the bilateral trade talks, may rejig the foreign investors’ composition of the emerging market basket, and force money into India. A deal between the US and Russia on ending the Ukraine war will be a slick bonus, as the current sanctions on Russian crude oil will ease. Finally, the American Supreme Court may declare the tariffs illegal.