Textiles and Gems Hit Hard: How US Tariffs Are Dragging Down India's Economy
- The IMF has lowered India's growth forecast for the next fiscal year to 6.2%, citing the negative impact of persistent US tariffs on key export sectors.
- While the IMF assumes high tariffs will remain, Indian officials dispute this baseline, arguing that a trade deal with Washington is near and market diversification is possible.
The International Monetary Fund (IMF) has officially maintained a cautious outlook for India’s economic future, projecting a slowdown in growth for the upcoming financial year. The Washington-based lender now expects India’s economy to expand by 6.2% in the fiscal year starting in April, a downgrade from its July forecast of 6.4%. This adjustment is largely driven by the assumption that punitive US tariffs on Indian goods will remain in place for the foreseeable future, acting as a significant drag on the nation's export potential.
Despite the downgrade for next year, the current financial picture remains relatively bright. The IMF projects growth of 6.6% for the ongoing fiscal year, fueled by a stronger-than-anticipated performance between April and June. This resilience is attributed to robust domestic consumption and the positive impacts of recent tax overhauls. However, the lender warns that this momentum faces a formidable obstacle in the form of American trade barriers, specifically the aggressive 50% tariffs that have been levied on key Indian export sectors.
A clear disconnect has emerged between the IMF’s technical analysis and the diplomatic optimism radiating from New Delhi. While the IMF’s baseline scenario assumes these high tariffs are the new normal, Indian authorities vehemently disagree. Government officials argue that the 50% levy is a temporary bargaining chip and that a comprehensive trade deal to lower these barriers is imminent. furthermore, Indian policymakers believe the IMF has overestimated the negative impact, arguing that Indian exporters have the flexibility to pivot toward other global markets to offset losses in the US.
The stakes of this disagreement are high because the United States is India's largest export destination. The tariffs are not hitting abstract financial instruments; they are striking at the heart of labor-intensive industries that employ millions of people. Sectors such as textiles, leather, footwear, and gems and jewelry have borne the brunt of the levies. The pain is already visible in the macroeconomic data: India’s total exports plunged nearly 12% in October compared to the previous year, pushing the country’s trade deficit to record levels.
The IMF’s report highlights that the danger extends beyond immediate trade numbers. If the uncertainty regarding US-India trade relations persists, it risks creating a "chilling effect" on investment. Both domestic companies and foreign investors may delay capital expenditure plans until there is clarity on the tariff regime. The lender warns that prolonged friction would not only reduce exports but could also open a small "output gap" next year, preventing the economy from running at its full potential capacity.
Despite these external headwinds, the IMF offered a strong endorsement of India’s internal economic management. The report praised the country’s macroeconomic policies and structural reforms, particularly the expansion of digital public infrastructure and the refinement of the Goods and Services Tax (GST). These foundational changes have contributed to rising living standards and a marked reduction in extreme poverty, providing a sturdy buffer against global economic shocks.
Looking ahead, the path to regaining a higher growth trajectory relies heavily on diplomatic breakthroughs. The IMF notes that growth outcomes could significantly outperform their current projections if the tariff dispute is resolved in the near term. With US President Donald Trump recently signaling a willingness to lower tariffs "at some point" and trade teams meeting frequently, the window for a resolution remains open. If a deal is struck, India could quickly return to its medium-term potential growth rate of 6.5%, shaking off the current "tariff overhang."