Reciprocal Tariffs: Casting a wider net

On April 2, the US Government cast its net wide by rolling out tariffs to be implemented around the world. This much awaited and widely spoken event along with elevated valuations in India and foreign fund outflows led to significant volatility in equities in the last six months. Since February 2025, global equities, in particular, US equities have seen notable correction too and the US dollar has been weakening.

With the enforcement of tariffs effective April 9, uncertainty is expected to increase across global markets due to the extensive and widespread nature of these tariffs. This initial action is likely to be followed by retaliatory measures from China (already announced today) and other countries, which can further add to the uncertain environment. It is important to note that the US is not immune to this uncertainty. At this early stage, it is premature to draw definitive conclusions based on the tariffs.g

India, however, is well-positioned among emerging markets due to its relatively lower tariffs. The Indian economy is primarily domestic driven, with exports constituting a small portion of GDP, making it less susceptible to global trade disruptions. Recent concerns about US growth have triggered capital outflows from the US and a depreciating dollar, making India a more attractive destination for inflows. The 15-25% correction in frontline indices over the past six months has also made valuations more reasonable. Another factor that works in favour of India is lower crude oil prices.

The economic impact on India is projected to be a modest reduction in growth by approximately 50 basis points, while the US may experience a more substantial slowdown, with growth potentially decreasing by 150-200 basis points. The global monetary policy landscape suggests the possibility of further rate cuts, and corporations may face indecision, leading to a potential pullback in investments. More than expected rate cuts in the US will open the door for further monetary easing in India and other countries.

The US accounts for 18% of India’s total exports (vs 23% for Taiwan, 19% for South Korea and 15% for China), but relative to GDP it is around 2% for India and 3% for China (vs 14% for Taiwan, 10% for Thailand and 7% for South Korea). Most sectors in India (in Nifty 50) derive less than 10% of their revenue from exports to the US. IT (11% weight in Nifty 50) and Pharma (4% weight) are the only sectors with large US exposure and both have been exempt from tariffs.

What happened on April 2, 2025?

The US imposed a broad country- level tariff of 26% on exports from India effective midnight on April 9. However, pharmaceuticals, steel, copper, bullion, energy, and other certain minerals /commodities that are not available in the US are exempted while tariff on automobiles is 25% for all countries. Notably, tariffs announced on other key competitor countries is higher than India, which could be a positive for Indian manufacturers. Import tariffs on other countries like China (34%), Vietnam (46%), Taiwan (32%), Thailand (36%), Indonesia (32%), and Bangladesh (37%) are much higher than India's (26%). Interestingly, the US announced reciprocal tariffs at only half the rate that other countries impose on US products, which leaves room for negotiation.

Tariffs implemented by the US

Source: Kotak Institutional Equities

India’s trade surplus with the US almost doubled in the last decade

Source: Avendus Spark

Impact on sectors

Pharmaceutical companies have the highest exposure to the US followed by Chemicals / Agrochemicals, Textiles and Auto & Parts.

• Auto & Parts: Apart from vehicles, the auto tariffs of 25% will also cover auto parts, including engines, transmissions, lithium-ion batteries, tires, shock absorbers, spark plug wires, and brake hoses.


• Machinery and Electrical: This is India’s top exported category to the US with $22bn in exports (13.5% of the total exports).


• Textiles and Apparels: The latest round of tariffs may help Indian exports get more competitive compared to China and Vietnam, which had a market share of 21% and 19% respectively, compared to India's 6%. The reciprocal tariffs on China have increased the duties to 34% and 46% for Vietnam. Furthermore, Indian apparel exporters could potentially benefit from China+1 as the tariff advantage for India makes it a sound sourcing hub.


• Pharmaceuticals: This segment has been exempted from reciprocal tariffs so far, however, possibility of tariff still exists. The US is India’s largest export market for pharmaceuticals.


• Gems & Diamonds: Indian exporters of cut and polished diamonds might be hit because this category accounts for 57% of all gems and jewellery exports ($13.6bn) from India to the US. Currently, there is no duty on items sold in the US, but this will rise to 26% now.

Meanwhile, India has already offered reductions in its own tariff rates charged to the US and has increased energy purchases from the US in March. Earlier, India had already reduced tariffs on motorcycles which would benefit motorcycle exports from the US to India. Additionally, the Indian union budget announced cuts in import duties for all countries on other sectors like electronics, and steel. The US accounted for 5% of India’s crude oil imports in FY24 and as per the agreement between two countries, US could become a leading supplier of oil and gas to India.

Appendix

DISCLAIMER

Source & Date: Morgan Stanley, Avendus Spark, Kotak Institutional Equities Date: 3^rd April 2025 Disclaimer: This document represents the views of Axis Asset Management Co. Ltd. and must not be taken as the basis for an investment decision. Neither Axis Mutual Fund, Axis Mutual Fund Trustee Limited nor Axis Asset Management Company Limited, its Directors or associates shall be liable for any damages including lost revenue or lost profits that may arise from the use of the information contained herein. No representation or warranty is made as to the accuracy, completeness or fairness of the information and opinions contained herein. The AMC reserves the right to make modifications and alterations to this statement as may be required from time to time.

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