Nifty stumbled on Trump’s Liberation Day tariff threats

India’s benchmark stock index Nifty stumbled over 700 points (~3.50%) in the last four trading days on negative global cues amid the Trump tariff tantrum. Tariff King India is also a soft target of Trump because India charges exorbitant brutal tariffs (import duties) on some luxury US goods as the so-called ‘Sin Tax’. India, often termed as ‘Maharaja of Tariffs by Trump admin officials, imposes 100% tariffs on US automobiles including higher-end Harley-Davidson Motorcycle and 150% US-made alcoholic beverages.

These so-called luxury US goods are also subjected to India’s complex and extremely high Luxury GST of 28% (Sin Tax) and other local levies and duties. The result is these US items are often out of reach of even high middle-class consumers due to lack of affordability. Only a handful of super rich in India can afford those ‘Sinful’ US goods (luxury items).

Trump’s threats of imposing reciprocal tariffs have raised significant concerns globally, with India being one of the countries likely to feel the impact due to its trade relationship with the United States. As of April 1, 2025, Trump has signaled his intent to impose tariffs on nations that levy high duties on American goods, with implementation potentially starting April 2, 2025. This policy aims to mirror the tariff rates that other countries impose on U.S. exports, affecting both allies and adversaries. For India, a key trading partner of the U.S., the implications could be multifaceted, influencing its economy, specific sectors, and long-term trade strategies.

Trump’s threats of imposing reciprocal tariffs have raised significant concerns globally, with India being one of the countries likely to feel the impact due to trade surplus and high volume trade with the US. As of April 1, 2025, Trump has signaled his intent to impose tariffs on nations that levy high duties on American goods, with implementation potentially starting April 2/3, 2025. This policy aims to mirror the tariff rates that other countries impose on U.S. exports, affecting both allies and adversaries. For India, a key trading partner of the U.S., the implications could be multifaceted, influencing its economy, specific sectors, and long-term trade strategies.

Background of Trump’s Reciprocal Tariffs

Trump’s reciprocal tariff policy is rooted in his belief that the U.S. has been unfairly treated in global trade, with countries like India imposing significantly higher tariffs on American goods than the U.S. does on theirs. He has frequently cited India’s high tariffs, such as those exceeding 100% on automobiles like Harley-Davidson motorcycles, as an example of trade imbalance. The policy, expected to be detailed further by the U.S. Trade Department between now and its potential rollout, seeks to equalize these disparities, potentially dismantling decades of trade norms established under the World Trade Organization (WTO), which allowed developing nations like India higher tariffs to protect nascent industries.

Trump frequently disputes about WTO rule as an unfair advantage for higher tariffs by so-called developing nations as the US has now lost its ‘Golden Age’ manufacturing powerhouse to China and other developing nations. In the process, the US manufacturing sector except the military-industrial complex, military and civilian jets/aerospace and nuclear power, has been in virtual recession for the last few decades, resulting in huge job losses, unemployment/under-employment, homelessness and drug addiction. Thus nationalistic Trump is trying to restore the US manufacturing industry for consumer durable goods including automobiles.

Now Trump’s reciprocal tariffs may be a double sword for Tariff King India. If it is implemented at face value, it will harm Indian exports to the US, while if the corrective step of tariff reduction is taken by India to US tariffs levels, then Indian producers could risk losing the domestic market to the US; Indian upper middle-class consumers may prefer better quality US goods, even at a reasonably higher rate.

India’s Trade Relationship with the U.S.

The U.S. is India’s largest export market, accounting for approximately 18% of India’s merchandise exports in FY24, with goods worth $77.5 billion. Between April and December 2024, exports to the U.S. grew by 5.57% to $59.93 billion, while imports from the U.S. increased by 1.91% to $33.4 billion, resulting in a merchandise trade surplus of about $23-35 billion in India’s favor annually. India’s average tariff on U.S. goods is around 11% (trade-weighted), compared to the U.S.’s 2.5% on Indian goods, a gap that makes India a prime target for Trump’s reciprocal tariffs (tit-for-tat).

India's total exports to the United States, including both goods and services, have shown significant growth in recent years. In FY24, India's total exports to the US were around $84 billion. His figure encompasses goods such as pharmaceuticals, diamonds, electronic equipment, jewelry, and petroleum products, as well as services like IT, business process outsourcing, and technical services. In the same period (FY24), India's imports from the U.S., including goods and services, amounted to around $47 billion. Major imports include mineral fuels, precious stones, machinery, and electrical equipment. This results in a trade surplus for India with the U.S. of approximately $37 billion for FY24.

Among all major trading partners, India has a trade surplus only with the US and thus India needs US export revenue and also remittances for its USD (FX) reserve. Thus apart from any strategic and geopolitical angle, India also needs good trading and diplomatic relations with the US for its USD reserve as it also needs to pay its huge import bill from China and also for oil import in USD.

Potential Economic Impact on India

Export Losses: There are some estimates that reciprocal tariffs could reduce India’s exports to the U.S. by $2 billion to $7 billion annually in FY26, with a potential GDP growth reduction of 5-10 basis points from the current 6.6% estimate. The US is a major destination for Indian merchandise and also service exports, including textiles, pharmaceuticals, automotive components, and jewelry. The implementation of reciprocal tariffs could lead to increased duties on these products, potentially reducing their competitiveness in the U.S. market. For instance, the U.S. currently accounts for 28% of India's textile exports, valued at approximately $9.6 billion in the fiscal year 2024. Higher tariffs may adversely affect this sector.

Rupee and Inflation Pressures: A stronger U.S. dollar, fueled by Trump’s policies, could pressure the Indian rupee, which has already slid from 83 to 87 since September 2024. This local currency (INR) depreciation increases import costs, potentially driving imported inflation in India, particularly for oil and components.

Trade Surplus Reduction: India’s trade surplus with the U.S., which doubled to $35 billion over the last decade, could shrink as exports face higher duties, prompting India to import more U.S. goods (e.g., defense equipment, oil, nuclear power-related goods) to balance trade.

Trade Disruptions: The tariffs are expected to disrupt supply chains and increase the cost of goods and services, as businesses may pass on additional costs to consumers.

In summary, Trump’s reciprocal tariffs could exacerbate existing economic challenges for India. The Indian rupee, which had experienced a brief recovery, is anticipated to decline towards historic lows over the next 12 months. Factors contributing to this downturn include slowing economic growth and the potential impact of U.S. tariffs on India's exports, leading to a lower trade surplus for India.

Sectoral Vulnerabilities: Sectors with significant tariff differentials are most at risk:

·       Agriculture: India’s tariffs on U.S. agricultural goods average 39% (trade-weighted 65%), far exceeding the US’s 5%. Reciprocal tariffs could hit India’s food and farm exports hard. Exports like dairy products, fish, meat, and processed seafood will face significant tariff hikes, impacting their competitiveness.

·       Automobiles & parts: India’s 100%+ tariffs on U.S. automobiles & parts (accessories) contrast with the 2.4% US tariff on India, threatening Indian auto exports. India's auto exports to the US, primarily accessories and parts, may face a 25% tariff, though the sector is considered relatively insulated as many Indian auto parts production facilities are now based in Mexico for US exports and thus may be covered under USMCA.

·       Pharmaceuticals: As a major supplier of generic drugs to the U.S., higher tariffs could reduce the competitiveness of various Indian Pharmaceutical companies/exporters. While India's pharmaceutical exports, mainly generic formulations, are crucial to the US market, they could face increased tariffs, potentially affecting drug prices for US consumers and the viability of Indian supply.

·       Textiles and Apparel: These labor-intensive sectors face moderate risk but could see demand drops due to price hikes in the U.S. market. This sector is particularly vulnerable due to its high exposure to the US market. The US buys 28% of India's textile exports, and these exports face a risk of a 10% tariff hike.

·       Gems and Jewellery, Chemicals: These sectors, contributing billions to U.S. exports, are also vulnerable.

·       Liquor, Meat, and Sugar: Products such as alcoholic beverages, meat, and sugar are also expected to be among the most affected by the new tariffs, potentially leading to decreased export volumes and revenue losses for Indian producers.

Opportunities Amid Challenges

Diversification: Like China, India’s efforts to diversify export markets (e.g., Southeast Asia, Middle East) and products (e.g., engineering goods) could mitigate losses. The “China +1” strategy, where companies shift supply chains from China, positions India favorably, especially if China faces steeper U.S. tariffs (10.5% of U.S. imports vs. India’s 2.5%). Despite Trump's trade war challenges, India may benefit from trade diversification. Companies looking to avoid tariffs on Chinese goods might expand/diversify manufacturing operations in India, particularly in electronics and pharmaceuticals, if India can make a deal with the US through BTA.

Domestic Resilience: India’s economy, driven largely by domestic consumption (exports are ~4% of GDP), may absorb the shock better than export-heavy nations like Vietnam (25% of GDP tied to U.S. exports).

India’s Strategic Response-India is adopting a multi-pronged approach

·       Selected Tariff Reductions: Proposals to cut tariffs on over 30 items, including cars and chemicals, aim to preempt U.S. retaliation.

·       Retaliation Readiness: Experts suggest India may mirror U.S. tariffs if imposed, as it did in 2019 against steel tariffs, to protect its interests.

·       Trade Diversification: Strengthening ties with the EU, UK, South East Asia, ASEAN, and also Africa through free trade agreements (FTAs) reduces U.S. reliance and counterbalances US trade risks.

·       Domestic Manufacturing Boost: Initiatives like “Make in India” aim to enhance domestic production, reducing import dependency and boosting export competitiveness. Also, initiatives like 'Make in India' could be expanded to attract companies exiting China due to tariffs.

Broader Implications

Trump’s policy could disrupt global supply chains, potentially triggering a trade war. While U.S. consumers may face higher prices, India could see short-term US exports and some economic slowdown. The uncertainty hinges on the final tariff details and India’s diplomatic agility. As of now, India’s relatively closed economy and proactive measures suggest a manageable impact, but vigilance and adaptability will be key as April 2 approaches.

Indian Government Response: In response to the impending tariffs, India has taken steps to address trade concerns. In February, the government reduced tariffs on motorcycles and whiskey and pledged to review additional tariffs. Additionally, India offered to increase imports of U.S. energy and defense equipment.

Tariff Adjustments: India might adjust its tariffs on US goods as a retaliatory measure or to negotiate better terms. Negotiations are ongoing, with India expressing willingness to lower or eliminate tariffs on 55% of its imports from the U.S., valued at $23 billion, contingent upon relief from the reciprocal tariffs.

Bilateral Trade Negotiations: India is actively negotiating a bilateral trade agreement (BTA) with the U.S., with Commerce Minister Piyush Goyal engaging U.S. officials. Recent tariff cuts on motorcycles and increased U.S. imports signal goodwill, potentially softening the tariff blow. India and the US are negotiating a trade agreement to increase market access and reduce tariff barriers. This could mitigate some impacts of the reciprocal tariffs. As a delaying tactic, India may formally start the BTA negotiations with the US from April 2025 (after getting details about Trump’s reciprocal and sectoral tariffs) and may finalize the 1st phase of BTA by September 2025.

India’s Services Exports to the US may be subject to various regulatory hurdles apart from any potential digital tax to force India to reduce its high tariffs on US goods. India consistently exports a significant amount of services to the U.S., estimated at around $28-30 billion annually in recent years, contributing to the total export figure. India's service exports to the United States are a critical component of their bilateral trade relationship, characterized by a strong emphasis on knowledge/skill-based and technology-driven sectors.

Conclusion: Short-term pain for long-term gain

The implementation of President Trump's reciprocal tariffs represents a significant shift in U.S. trade policy, with far-reaching consequences for India's export-driven sectors and overall economic health. While the Indian government is actively seeking to mitigate these impacts through negotiations and policy adjustments, the full extent of the tariffs' effects will depend on the outcomes of ongoing diplomatic engagements and the responses of various industries. Overall, while Trump's reciprocal tariffs pose significant challenges for India, they also present opportunities for strategic economic diversification and growth.

Trump’s reciprocal tariffs narrative could be also a blessing in disguise as India has to rationalize its decades-old legacy system of high tariffs in the name of protection for domestic producers. Although there is a political funding angle to it, in reality, it promoted the inefficiency of Indian producers and products in the global market. Indian policymakers also have to ensure a proper policy framework for ease of doing business in India with lower input costs. Thus, it’s essential to recalibrate and reduce India’s indirect tax structure like tariffs, GSTs etc. This will also help to reduce India’s high cost of living, sticky & elevated inflation (5% on average for the last twenty years), and the legacy issue of high unemployment (8% on average).

India has to increase the contribution of its manufacturing sector to GDP significantly for mass employment like in China. For this, India has to put in place proper policies from universal good quality of education, skill development and also proper industrial and logistical infra development to compete with mighty China in the global export field. Overall, India has to improve its productivity multifold and for that India has to rest its political policies, and economics to be a developed economy by 2047, the 100 years of its independence from the British Raj.

Market Wrap:

In the last two weeks, India’s Nifty was boosted by HDFC Bank, Bharti Airtel, L&T, Kotak Bank, SBIN, Axis Bank, RIL, Power Grid, Ultra Tech Cement, Grasim, NTPC, ONGC, ICICI Bank and Trent, while dragged by INFY, M&M, Zomato, Sun Pharma, Hindalco, Cipla, Titan, Maruti, HCL Tech, ITC, TECHM, Tata Motors, Tata Steel, DRL, Shriram Fin and TCS.

Indian automobiles, oil refiners, major pharmaceutical exporters, jewelry, metals/steel, electronics, and also IT service companies are vulnerable to Trump trade war tantrum. Banks & financials may be also vulnerable indirectly as they may face elevated NPA amid India’s economic slowdown.

Technical view: Nifty Future

Whatever may be the fundamental narrative, technically Nifty Future (CMP: 23400) now has to sustain over 23300 for a recovery to 23750/23950 and further rally to 24050/24200*-24400/24600 and a further 24700/25050-25200/25450* and 25650/26000-26200/26500 and 26650*/26800-27000/27200* in the coming days; otherwise sustaining below 23250, it may further fall to 23200/23000-22850/22750 and 22400/22300-22000/21800* and further  21500/21200-20900/20450 and even 19800/19600-17650/16700 in the coming days.