6th round of India-US negotiations on Aug 25 important: Morgan Stanley
The sixth round of India-US negotiations to reach an interim trade deal, currently slated for August 25, will be important as US President Donald Trump announced an additional 25 per cent tariffs on India, raising the total tariffs to 50 per cent effective from August 27, a Morgan Stanley report said on Thursday.
The report stated that it will “closely monitor export growth and domestic demand data for spillover impact, along with any incremental policy response”.
In FY25, India's total exports to the US stood at $86.5 billion (2.2 per cent of GDP). The original 25 per cent tariff and the additional penalty are both applicable on 67 per cent of India's exports to the US, which translates to $58 billion (1.5 per cent of GDP) (the remaining are sectors under section 232).
To assess the impact of tariffs on India's GDP, we use inferences from the input-output table modelled by our global team.
Assuming all goods exports are subject to a 50 per cent tariff rate, the direct impact on growth is likely to be 60bps while the indirect impact could be of a similar magnitude, over a period of 12 months.
A similar sensitivity analysis for the 67 per cent of non-exempted goods suggests that the direct impact could be 40bps while the indirect impact could be of a same magnitude, taking the total impact to 80bbps, said the report.
The sensitivity analysis refers to linear impact basis shock from external demand and does not take into account mitigating factors such as domestic policy response and or export market diversification.
“On the monetary policy front, we expect RBI to undertake further rate easing, with potentially two additional rate cuts (25bps each), over and above the 25bps rate cut pencilled in our base case. Moreover, the central government is likely to pause the fiscal consolidation and potentially allow capital spending to increase to support domestic demand,” the report mentioned.
“We will closely monitor geopolitical developments and high frequency growth data. On the trade side, the sixth round of negotiations between India and the US, currently slated for Aug 25, will be important to track. We will closely monitor export growth and domestic demand data for spillover impact, along with any incremental policy response,” it added.
