The decision of President Donald Trump to enforce hefty tariffs on Indian exports is casting a frightful shadow over investors who are contemplating the possibility that this action could widen the economic divide between India and China in the international markets. The aforesaid step is being taken at a moment when India’s stock market is seven frowns deep down with a valuation lagging that of China by $6.3 trillion, the biggest difference after March.
One of the latest steps is the imposition of a 50% duty on a wide range of goods imported from India, including precious stones, garments, chemicals, and the like, with special reference to shrimp. Though the total exports from India to the U.S. account for no more than 2% of the country’s GDP, the sectors targeted in this move are the ones with a large pool of labor and are the main contributors to export revenues. After the news, some companies’ stock prices that belong to these industries have dropped by up to 6%.
It is suggested by the analysts that this blow to the Indian economy can cut between 0.3 and 0.8 percentage points from the GDP growth in India this year. Manufacturing will lose its vitality if this happens, and it will also slow down the injection of capital, especially in those areas that had recently recovered after the COVID-19 pandemic. Exporters are the ones who are going to be hit with increased costs, lowered competitiveness in the U.S. market, and the possibility of losing loyal customers to competitors from other countries.
Investor confidence has also changed radically. In comparison to China, India’s MSCI equity index for this quarter has decreased by 10 percentage points and is in a situation where it will have its worst annual performance since 2017. Foreign investors are already taking their money out of the country and putting it into other markets that are considered less vulnerable to U.S. trade penalties, and therefore putting further pressure on India’s currency and stock market valuations.
This tariff is like a thunderbolt that has hit a sensitive point in India’s overall economic plan. The country’s internal demand is still very strong, and the government, besides the home market, has largely counted on the growth of exports to support the rise of heavy industry. But the scenario of a sustained slump in foreign sales can become a reality, only to see the business community being obliged to scale down their output or even delay the rise of their capacity. In addition, this may also extend to other related activities, viz., transportation, shipping, and the material supply chain.
The problem is that lost sales are not the only thing that the company faces, but lost market share, too. The longer-term consequences of the tariffs, therefore, may be far worse than what is reflected in the immediate GDP effect, given the difficulty of re-establishing relations with buyers once alternatives have been found, whether it be in Southeast Asia, Latin America, or back to domestic production.
