New Delhi [India], August 8 : If the recently announced US tariffs on Indian goods persist for a longer period, the impact on India's economic growth could be between 0.4 per cent and 0.8 per cent, Morgan Stanley has said in a report.
The US has increased tariffs on Indian goods to 50 per cent. According to the report, if tariffs remain at these high levels for 12 months, India's growth could see downside risks, assuming no mitigating factors.
"To assess the impact of tariffs on India's GDP, we use inferences from the input-output table modelled by our global team," the report said.
The report analyzed that assuming all goods exports are subject to a 50 per cent tariff rate, the direct impact on growth is likely to be 60bps (basis points), while the indirect impact could be of a similar magnitude over a 12-month period.
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 the same magnitude, taking the total impact to 80bps.
The sensitivity analysis is based on a linear impact from the external demand shock and does not consider mitigating factors such as domestic policy response or export market diversification.
The report also noted that policy support could step up to bolster domestic growth conditions if downside risks persist.
Breaking down the tariff impact, the report explained that the primary impacts account for the decline in value-added GDP from lower demand, either in the sector or product that is tariffed, or in all goods from a country if it faces a blanket tariff.
The secondary impacts look at how lower initial demand causes global ripple effects in intermediate inputs linked to the goods initially impacted. Reduced output from these effects can lead to a decline in value-added production, which, if sustained, could result in falling wage bills or employment losses.
The report also shared that there is also a tertiary impact, arising from smaller operating profits and a weaker business environment, which could discourage investment.
"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 August 25, will be important to track," Morgan Stanley said.
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