US tariff impact: India can increase exports to other countries, leverage UK FTA benefits

New Delhi, Aug 20 To mitigate the impact for the Micro, Small and Medium Enterprises (MSMEs) from the US tariffs, India can increase exports to other countries as well as leverage the benefits of the recently concluded trade deal with the UK and a potential deal with the European Union (EU), a report said on Wednesday.

The imposition of higher tariffs by the US will affect MSMEs, which account for as much as 45 per cent of India's total exports, according to the report by Crisil Intelligence.

Currently, the US levies a 25 per cent tariff on Indian goods. However, it has imposed an additional 25 per cent tariff that will take effect from August 27, bringing the total tariff on Indian products to a substantial 50 per cent.

The additional ad valorem, if implemented, will have a meaningful impact on certain sectors and remains monitorable, said the report.

"The India-UK free trade agreement is supportive for MSMEs in export-oriented sectors such as textiles, gems and jewellery, seafood, leather and pharmaceuticals," said Elizabeth Master, Associate Director, Crisil Intelligence.

Although these account for less than 3 per cent of imports to the UK, except readymade garments or RMG (6 per cent), the deal would improve MSME competitiveness versus Bangladesh, Cambodia and Turkey, and lend an edge over China and Vietnam in RMG, Master added.

The textiles, gems and jewellery and seafood industries, which account for 25 per cent of India’s total exports to the US, are likely to be the most affected. MSMEs have more than 70 per cent share in these sectors. Another sector likely to face the heat is chemicals, where MSMEs have a 40 per cent share.

According to Pushan Sharma, Director, Crisil Intelligence, partial absorption of the increased product prices due to higher tariffs will put pressure on MSMEs, squeeze their already-slim margins and pose a material challenge to their competitiveness.

Similarly, in the gems and jewellery sector, MSMEs in Surat, which dominate diamond exports with over 80 per cent share, will feel the tariff shock.

In auto components, the impact is expected to be marginally unfavourable as the US accounts for only 3.5 per cent of India's total production.

Some sectors, however, remain unscathed for now. For instance, pharmaceutical products, which comprise a 12 per cent share in exports to the US, are currently exempt from tariffs.

In steel, the US tariffs are expected to have a negligible impact on MSMEs as these are engaged mainly in the re-rolling, producing long products, whereas the US primarily imports flat products from India. Also, the US accounts for only 1 per cent of India's steel exports, the report noted.

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