The escalating trade tensions triggered by the US tariff war are set to disrupt global supply chains and create significant challenges for India’s export sector. A recent report by Crisil highlights how increasing protectionism and retaliatory trade measures could adversely affect industries such as textiles, pharmaceuticals, and auto components, posing a fresh challenge to India’s economic stability.
Impact of the US Tariff War on India’s Exports
India’s trade surplus with the US has been growing consistently, reaching $33.6 billion in 2023. While this may seem like a positive trend, it also makes India more vulnerable to protectionist policies from the US. If new tariff measures are imposed, Indian exporters could face higher duties on key products, leading to reduced competitiveness in global markets.
Moreover, the trade war has intensified competition for Indian businesses, especially with the potential influx of Chinese goods. As the US imposes higher tariffs on China, there is a possibility that surplus Chinese products will be redirected to India at lower prices, disrupting local industries.
Rupee Under Pressure: Forecast for 2026
The Indian rupee is expected to face volatility in the coming years due to trade uncertainties and capital outflows from emerging markets. Crisil projects that the rupee will settle at 88 per US dollar by March 2026. The rising current account deficit (CAD), projected to be 1.3 percent of GDP in fiscal 2026, could further weaken the currency.
However, India’s strong services trade surplus and robust remittance inflows are expected to provide some relief. These factors could help in managing external vulnerabilities despite the rupee’s depreciation.
Food Inflation: A Sign of Relief
Food inflation, a significant contributor to India’s consumer price index (CPI), is expected to ease in fiscal 2026. After rising consistently for three years, food inflation is projected to moderate to 4.4 percent, down from 4.9 percent in fiscal 2025. The primary reasons for this decline include:
- A normal monsoon leading to better agricultural output
- Stabilization of global food prices
- Lower crude oil costs reducing transportation expenses
This expected decline in inflation aligns with the Reserve Bank of India’s (RBI) monetary policy stance. Crisil predicts that the RBI may further cut the repo rate in fiscal 2026, following a 25 basis points cut in February 2025, in an effort to support economic growth.
India’s Economic Growth: Stability Amid Global Uncertainty
Despite global trade disruptions, India’s GDP is projected to grow at a steady 6.5 percent in fiscal 2026. Several factors contribute to this resilience:
- Government Infrastructure Investments: The government has budgeted 3.1 percent of GDP for capital expenditure, ensuring continued investment in infrastructure projects.
- Production Linked Incentive (PLI) Scheme: An 87 percent increase in PLI allocation for sectors like electronics, textiles, automobiles, and auto components is expected to boost manufacturing and exports.
- Easing Monetary Policy: The RBI’s decision to lower interest rates could stimulate private consumption and investment.
Challenges and Risks Ahead
While India’s growth prospects remain positive, several risks could pose challenges:
- Impact of the US Tariff War: Higher duties on Indian exports could slow down trade and affect revenue generation for key industries.
- Capital Outflows: Rising protectionism in the US could lead to foreign capital moving away from emerging markets like India, affecting foreign exchange reserves and investments.
- Private Sector Investment: Although government-led investments are strong, private sector participation needs to increase to sustain long-term growth.
Navigating Economic Uncertainty
As India steers through a period of global economic turbulence, a strategic focus on domestic demand, infrastructure development, and export diversification will be crucial. While the US tariff war poses immediate challenges, India’s strong economic fundamentals, policy interventions, and investment-friendly measures can help mitigate the impact and sustain long-term growth.
With prudent economic policies, a favorable business environment, and proactive government initiatives, India has the potential to emerge stronger, turning these global challenges into opportunities for a more resilient and self-reliant economy.
