US President Donald Trump’s decision to impose a 25 per cent tariff on import of goods from India will have a significant impact on earnings of companies in sectors including diamond polishing, shrimp, home textiles and carpets. Besides this, an additional 25 per cent tariff will make Indian exports to the US unviable for the aforementioned sectors as well as other segments like ready-made garments (RMG), chemicals, agrochemicals, capital goods and solar panel manufacturing, which have sizable trade exposure to the US.
Earlier on August 6, Trump had signed an executive order imposing an additional 25 per cent tariff on imports from India, in response to India “directly or indirectly” importing oil from Russia. This is over and above the 25 per cent tariff on Indian imports that was imposed on July 31, taking the cumulative duty rate to 50 per cent.
It is worth noting here that during the last fiscal, the US accounted for around 20 per cent of India’s merchandise exports and approximately 2 per cent of its overall GDP.
US tariff impact: Sectors to be most hit
A report by Crisil Ratings stated that the extent of impact will vary depending on exposure, ability to pass on incremental costs to customers, and relative tariff disadvantage versus competing nations. The 25 per cent reciprocal tariff on India already in effect exceeds those applicable to many competing Asian countries except China.
Many sectors, as mentioned earlier, Crisil said, may see sales volume decline due to high reliance on US trade and costs rise due to partial absorption of tariffs, ultimately affecting their earnings.
1) For diamond polishers, exports to the US accounted for around 25 per cent of total revenue last fiscal. Already facing tepid demand for natural diamonds in the US and the growing demand for lab-grown alternatives, companies are now grappling with higher costs that cannot be passed onto American retailers. According to Crisil, the tariff will also put further pressure on the already modest operating margin of the sector due to reduced fixed-cost coverage and the onus to bear the higher tariff cost.
2) The US accounts for around 48 per cent of revenue for Indian shrimp exporters. With applicable reciprocal tariffs, countervailing duty, and anti-dumping duties in place, India is now one of the highest-taxed major shrimp exporters to the US. This, per Crisil, could drag down export volume, even as players look for alternative markets to support their exports. Competition from Ecuador, which benefits from lower tariffs, combined with razor-thin margins, means shrimp exports could see significant volume declines.
3) Home textiles and carpets, highly dependent on the US market for approximately 60 per cent and 50 per cent of their exports respectively, are also expected to suffer steep revenue and profit contractions. The discretionary nature of these products limits the ability to pass higher costs onto consumers.
Mixed outlook for other sectors
Other sectors like ready-made garments, agrochemicals, specialty chemicals, and capital goods have moderate exposure to the US, ranging from 5-20 per cent of revenue. Crisil said, with the limited exposure, the 25 per cent reciprocal tariff is likely manageable for these sectors but the additional 25 per cent penalty will cause pronounced setbacks.
Ready-made garment exporters, reliant on the US for 10-15 per cent of revenue, face near-total erosion of their competitive edge in the American market, outpriced by manufacturers in China and Vietnam.
Agrochemical exports to the US, which account for 11-12 per cent of the sector’s revenue, will also face challenges, with China being a key competitor. “The ability of Indian companies to divert products to alternative markets such as Brazil and other Latin American countries will be limited by the presence of strong Chinese competition there,” Crisil said.
The specialty chemicals segment gets only about 5 per cent of its revenue from the US, so it would have limited ability to pass on tariffs. The sector is just starting to recover after two years of weak demand, Chinese dumping, and inventory corrections that hurt profitability.
For capital goods manufacturers, the revenue exposure to the US is around 15 per cent. The sector, boasting strong technical expertise and longstanding US relationships, may weather the storm on existing contracts but face challenges securing fresh orders amid competition from lower-tariff countries like Mexico.
For India’s solar panel manufacturing industry, volume growth and operating profitability are unlikely to be significantly impacted, as exports to the US account for only 10-12 per cent of overall sales volume.
Tariffs risk hit, but India’s buffers remain strong
The US tariffs carry the risk of triggering a broader slowdown in US demand, especially for discretionary goods, driven by inflation concerns. Furthermore, disrupted global trade dynamics may see countries redirect exports away from the US to other countries, including India. This, Crisil said, could negatively impact the earnings of domestic companies in sectors such as steel, chemicals and agrochemicals, until global demand and supply rebalance.
However, potential bilateral agreements with other key trading partners and the imposition of safeguard duties by the Indian government, as seen in the past, should limit this impact. Plus, the tariffs come at a time when corporate balance sheets have strengthened significantly, which could cushion the credit impact.
“…strong corporate balance sheets, potential bilateral trade agreements with other countries and the possibility of support from the Indian government for the impacted sectors could mitigate the credit impact to some extent,” Crisil said.