Donald Trump's 50% Tariff A Challenge To 'Make in India' Push, Says Moody's

US President Donald Trump's punitive 50 per cent tariff on imports from India could pose a serious challenge to New Delhi's self-reliance ambitions under the Atmanirbhar Bharat mission. America's move, linked to India's continued purchase of discounted Russian oil, could not only erode the country's manufacturing competitiveness but also slow the GDP (Gross Domestic Product) growth by 0.3 per cent, according to a new report by Moody's Ratings.

Moody's, however, predicted that resilient domestic demand and the strength of the services sector will mitigate the strain on the economy. 

"We project that real GDP growth may slow by around 0.3 percentage points compared with our current forecast of 6.3 per cent growth for fiscal 2025-26 (ending March 2026). However, resilient domestic demand and the strength of the services sector will mitigate the strain," noted the report.

The report noted that while there will be a blow to manufacturing, especially in high-value sectors such as electronics and textiles, due to a reduction in demand in the US markets. The US is India's biggest export market, making up 18 per cent of exports and 2.2 per cent of GDP. 

"Beyond 2025, the much wider tariff gap compared with other Asia-Pacific countries would severely curtail India's ambitions to develop its manufacturing sector, particularly in higher value-added sectors such as electronics, and may even reverse some of the gains made in recent years in attracting related investments," the ratings agency added.

But the firm warned that reducing Russian oil imports to avoid penalty tariffs could make it harder for India to secure alternative crude supplies in sufficient quantities. Shifting away from discounted Russian crude could help the import bill, which would widen the current account deficit, especially amid weaker tariff competitiveness that could deter investment inflows. This could, in turn, drive up inflation and widen the current account deficit.

"We expect there will likely be a negotiated solution that falls between the two scenarios described above," Moody's said.

"The magnitude of the drag on growth from tariff obstacles will influence the government's decision to pursue a fiscal policy response, although we anticipate the government will adhere to its focus on gradual fiscal and debt consolidation."

However, Moody's noted that India's substantial foreign exchange reserves provide a buffer against external shocks.

Trump Tariffs And India's Response

Trump imposed an additional 25 per cent tariff on Indian goods on Wednesday, taking the total tariff to 50 per cent - far higher than those levied on other Asia-Pacific countries. Moody's noted that India's response will be critical in determining the eventual effect on growth, inflation and external balances.

On Thursday, Indian Prime Minister Narendra Modi said he is ready to "pay a very heavy price" for resisting US attempts to dictate the country's trade policies, as India took a defiant position in the wake of Trump's intimidation tactic. 

In order to minimise the impact of US tariffs on the Indian economy, the Reserve Bank of India (RBI) kept its key rates unchanged as expected and retained its "neutral" policy stance following a surprise 50-basis-point rate cut in June.

Global trade uncertainties, fueled by the US tariffs, have already unsettled foreign investors. Foreign portfolio investors have sold $900 million worth of Indian equities so far in August, after $2 billion in outflows in July, per a report by Reuters.

India's Russia Imports

India has sharply increased imports of Russian crude since 2022, taking advantage of discounted rates as traditional buyers retreated following Moscow's invasion of Ukraine. Russian oil accounted for 35.5 per cent of India's total crude imports in 2024, up from just 2.2 per cent in 2021, with the import bill surging to USD 56.8 billion from USD 2.8 billion over the same period. Only China bought more Russian crude than India last year.

Cheap Russian oil has played a key role in checking India's inflation, which is at a multi-year low. Abandoning these purchases could reverse that trend. 

(With inputs from ANI and Reuters)