Trump Tariff Tensions: Morgan Stanley thinks that although the immediate effects of tariff increases will probably be controllable, the indirect effects—like uncertainty eroding corporate confidence—are more worrisome.Given that US President Donald Trump is thinking of enacting reciprocal tariffs, which could have an effect on important areas of the Indian economy, India may face trade challenges. The indirect effects of tariff increases, such as uncertainties hurting corporate confidence, are more worrisome, according to Morgan Stanley, even though the direct effects will probably be controllable.
Trade Dynamics between the US and India
India sends 17.7% of its goods to the US, making it a vital trading partner. Even while it is still less than that of other Asian economies like China and Vietnam, India currently has a $45.7 billion trade surplus with the US. However, India is susceptible to reciprocal tariff policies due to its higher tariff rates, which average 8.5% compared to the US's 3%.
According to a Morgan Stanley analysis, there is a significant tariff disparity per product, and the following major industries might be impacted by reciprocal tariff increases: electricity, industrial machinery, gems and jewelry, pharmaceuticals, fuels, textiles, iron and steel, automobiles, and chemicals.
Any increase in tariffs would reduce the competitiveness of Indian exports in the US market, which could have an impact on the expansion of these sectors.
Possible Reactions from Policy
According to Foreign Secretary Vikram Misri, Prime Minister Narendra Modi and US President Donald Trump have decided to start talking about trade and tariff-related matters.
"We have indicated, and the two leaders have agreed today to start discussing trade and tariff-related issues," the Foreign Secretary said during a news briefing following a meeting between Modi and Trump in the White House.
Lowering import duties in the most recent Union Budget 2025–2026 is one of the actions India has already made to ease trade tensions. The government exempted 28 mobile phone battery components from tariffs and lowered customs taxes on high-capacity motorcycles. In order to promote the use of green technologies, basic tariffs on lithium-ion batteries used in electric vehicles have also been removed.
Tariffs and Their Effects on India
Although unlikely, the research cautions that a six percentage point increase in India's weighted average tariff rates would still be controllable. Indirect consequences, such as ongoing ambiguity in international trade policy, may, nevertheless, deter foreign investment and company confidence.
Morgan Stanley voiced fears that more tariff increases might be imposed on some industries, especially those like motorbikes that are currently subject to hefty duties. Furthermore, corporate confidence may be impacted by trade and tariff policy uncertainties, which could slow down global economic development. Furthermore, a higher US dollar and increased risk aversion could result from increasing uncertainty, making it more difficult for central banks to successfully improve domestic financial conditions.
Morgan Stanley anticipates that India would respond to negative risks by easing monetary policy, maybe going further than the 50 basis points of rate reduction that are now anticipated. To counteract possible trade shocks, the government can potentially raise capital expenditures.
Specifically, we expect monetary policy easing to be more extensive than in our base scenario (perhaps 100 basis points of rate decreases compared to the base case of 50 basis points) and to be accompanied by further support from liquidity and macroprudential standards. "A deeper slowdown in global growth could prompt policy makers to provide support through higher capital expenditure spending, even though fiscal policy is still on a consolidating path," Morgan Stanley stated.
Important metrics to track
Market observers will keep a careful eye on developments in capital flows, the US currency, and measures pertaining to US tariffs. In the upcoming months, any changes to US trade policy may have a significant impact on India's economic prospects.
0 Comments