Stock Market Decline as Trump Imposes 25% Tax on Indian Exports, Trade War Apprehensions Plague Investors
India is facing a substantial economic challenge due to the 50% tariffs imposed by US President Donald Trump on Indian exports, effective from August 7, 2023. These tariffs primarily target sectors such as gems, textiles, automotive parts, and footwear, posing a threat to approximately 25% of India’s GDP reliant on US exports, valued near $87 billion.
Key Impacts and Outlook
Export Sector and Employment
The textile and garment industries, particularly in hubs like Tiruppur, are at risk of major job losses, estimated between 100,000 and 200,000, due to declining exports to the US under the higher tariffs. About 30% of exports from these regions go to the US, equaling $5.1 billion last year.
GDP and Economic Growth
With the US constituting around 27% of India’s auto components exports ($22.9 billion) and significant exports in other targeted sectors, these tariffs create a major headwind, threatening economic growth and exports that contribute roughly a quarter of India’s GDP.
Stock Market Reaction
Trade tensions and escalation of tariffs typically exert downward pressure on export-oriented stocks and broader market sentiment due to growth uncertainties and potential earnings impact, especially in affected sectors like textiles and auto parts.
Currency Impact
Reduced export earnings and trade tensions usually weaken the Indian rupee against the dollar. However, no precise currency data is reported here.
Ongoing Negotiations and Outlook
There remains some hope for trade negotiations, as the tariffs’ enforcement date is August 27. The US has linked tariffs to India’s continued purchase of Russian oil, complicating talks.
Tariff Scope and Exceptions
Electronics, smartphones, and pharmaceuticals are currently exempt from these tariffs, providing limited relief to those sectors. Exceptions also exist for goods in transit before the tariff enforcement dates.
Future Impact
If these tariffs continue for a year, they could reduce India's GDP growth by about 30 to 40 basis points, according to HDFC Securities CEO Dhiraj Relli. Increasing doubts about the direction of Indo-US trade relations are causing investor mood to suffer.
The focus now turns to the Reserve Bank of India's monetary policy and any diplomatic moves to stem the potential damage from the trade tensions. Analysts warn that deteriorating diplomatic relations with Washington could spook foreign institutional investors and result in medium-term capital outflows.
Global Equities Response
Asian equities lifted on Thursday following Trump's ultimatum to impose 100% tariffs on chip exporters, with US-investing companies such as Apple Inc. being exempted.
In summary, the US tariffs have created a substantial economic challenge for India’s export sector, especially textiles and automotive components, with potential negative effects on GDP growth and employment, while increasing pressure on trade relations and currency stability. The future impact depends on the progress of trade negotiations and geopolitical developments, especially concerning India’s oil imports from Russia.
- The textile and garment industries, particularly in regions like Tiruppur, may experience significant job losses, estimated between 100,000 and 200,000, due to the higher tariffs imposed by US President Donald Trump, as approximately 30% of their exports go to the US.
- The tariffs, which primarily target sectors such as gems, textiles, automotive parts, and footwear, could threaten India’s GDP, as these sectors collectively contribute roughly a quarter of India’s GDP and the US constitutes around 27% of India’s auto components exports.
- The stock market reaction to the tariffs may involve downward pressure on export-oriented stocks and a negative impact on the broader market sentiment due to growth uncertainties and potential earnings impact, especially in sectors like textiles and auto parts.
- With the US tariffs in place, the Indian rupee may weaken against the dollar due to reduced export earnings and trade tensions, although no precise currency data has been reported.
- The future impact of these tariffs depends on the progress of trade negotiations between India and the US, the resolution of any geopolitical issues related to India’s oil imports from Russia, and the response of global equities, such as US-investing companies like Apple Inc. that have been exempted from the tariffs.
