The Indian economy could take a hit of up to 0.5 percentage points in its gross domestic product (GDP) if the United States imposes reciprocal tariffs on Indian exports, according to Economic Affairs Secretary Ajay Seth. Speaking in Washington during the International Monetary Fund (IMF) spring meetings, Seth explained that while such a move would have a “first-order” impact, it wouldn’t drastically affect the country’s economic momentum.

He emphasized that the “second-order” effect—stemming from a slowdown in the global economy—would pose a greater threat to India’s economic stability. As global uncertainty rises, particularly due to US-led trade protectionism and wider economic volatility, India remains cautious yet optimistic.

What Are First-Order and Second-Order Impacts?

The first-order effect refers to direct consequences of tariffs—in this case, a potential reduction of 0.2% to 0.5% in India’s GDP if the US enforces a 26% duty on Indian exports. While not negligible, this level of impact is something the Indian economy can likely absorb, considering its $4 trillion economic base and diversified export portfolio.

The second-order impact, however, involves broader ripple effects, such as weaker global demand, rising inflationary pressures, and reduced cross-border investment flows. These are harder to quantify but could erode growth prospects across sectors, especially in manufacturing, technology, and energy exports.

IMF Cuts Global Growth Outlook, India Feels Pressure

Adding to concerns, the International Monetary Fund has downgraded its global growth projection for 2025 to 2.8% from 3.3%, citing increasing risks from a possible global trade war and slowdown in key economies.

This downward revision came just before Seth’s statements, and it further reinforces the challenges that emerging markets like India face in a deglobalizing world. Trade protectionism, monetary tightening in developed economies, and energy volatility are expected to keep global markets on edge.

India’s Growth Outlook Still Stable

Despite external threats, the Indian government continues to maintain a growth forecast of 6.3% to 6.8% for the 2025-26 fiscal year. This optimism stands in contrast to the IMF’s projection of 6.2% and even more conservative forecasts by Goldman Sachs and Morgan Stanley, who now expect India’s growth to slow to 6.1% from 6.5% last year.

Seth explained that there is no immediate need to revise India’s official GDP outlook, especially as negotiations with the US are progressing well. The country is hopeful of avoiding harsh reciprocal duties by resolving trade disagreements diplomatically.

India-US Trade Talks Moving Forward

India has been working proactively to reduce trade friction with the US. According to Seth, “talks are moving strongly”, although no specific commitments have been revealed. Still, there’s a clear intent from both sides to de-escalate tensions.

In recent months, India has made several moves to appease Washington, including:

• Lowering import duties on iconic American products like Harley-Davidson motorcycles and bourbon whiskey

• Removing trade barriers and streamlining customs processes

• Increasing purchases of American energy and defense equipment

Senior-Level Engagement Continues

Following diplomatic engagements between Prime Minister Narendra Modi and US Vice President JD Vance, India’s chief trade negotiator Rajesh Agrawal is currently in the US to finalize further negotiations. This visit is seen as a key milestone toward securing a limited trade deal that would shield India from punitive duties and deepen strategic cooperation.

Meanwhile, Finance Minister Nirmala Sitharaman was also scheduled to meet US Treasury Secretary Scott Bessent. However, she returned to India prematurely following a terror attack in Jammu and Kashmir, which claimed over two dozen lives, prompting emergency national security responses.

Strategic Realignment and Tariff Diplomacy

India’s recent trade concessions signal a broader strategic realignment. The country is actively positioning itself as a key US partner in Asia, especially as China’s influence grows and global supply chains shift. By aligning on defense, energy, and technology, India hopes to mitigate trade tensions and attract investment in its high-growth sectors.

The willingness to cut tariffs and enhance cooperation reflects India’s calibrated approach to protect its economic interests without appearing to surrender to US pressure.

Impact on Indian Exports and Sectoral Breakdown

The sectors most vulnerable to US tariffs include:

• Textiles and apparel

• Pharmaceuticals

• Auto components

• Steel and aluminum

• Information Technology services

If a 26% levy were applied broadly across Indian exports to the US, price competitiveness would decline, potentially leading to order cancellations and margin compression. While large companies may absorb part of the impact through hedging and global diversification, MSMEs could face severe disruptions.

India’s Broader Economic Resilience

Despite these risks, India’s domestic economy remains on solid footing, supported by:

• Robust domestic demand

• Continued public capital expenditure

• A booming services sector

• Strong financial sector performance

India’s diversified trade partnerships, including with Europe, the Middle East, and Southeast Asia, also help cushion the blow from potential US protectionism.

Conclusion: Managing Risks Through Diplomacy and Diversification

The spectre of US tariffs is real, but India’s economic leadership is adopting a measured, diplomatic, and forward-looking strategy. While the short-term economic hit may be limited to 0.2%–0.5% of GDP, the larger battle is to shield itself from a globally synchronized slowdown.

With active trade talks, policy agility, and strategic partnerships, India is well-placed to weather trade shocks, while continuing its trajectory toward becoming a $5 trillion economy in the coming years.

The next few weeks will be critical as negotiations unfold, and all eyes remain on how New Delhi and Washington balance their economic priorities and geopolitical interests.

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