US tariffs could slash India’s GDP growth by up to 0.8% if prolonged: Morgan Stanley

Mumbai: India’s economic growth could take a significant hit if the recently imposed US tariffs on Indian goods persist, according to a new Morgan Stanley report. The financial services firm estimates a potential 0.4 to 0.8 percentage point reduction in GDP growth over 12 months, should the elevated tariff levels continue without any mitigating interventions.

The US has raised tariffs on Indian goods to as high as 50 per cent. “If tariffs remain at these levels for a full year, India faces clear downside risks to growth,” Morgan Stanley said, adding that this assumes no policy support or export diversification in response.

The report’s analysis, based on the global team’s input-output table model, outlines both direct and indirect impacts of the tariff hike. If all Indian goods exports are subject to the 50 per cent tariff, the direct hit to GDP growth could be about 60 basis points (bps), with indirect effects contributing an equal blow, bringing the total to 1.2 percentage points.

However, when considering only the 67 per cent of goods not exempt from the tariffs, the estimated impact is slightly lower—around 80bps in total, split evenly between direct and indirect channels.

The assessment uses a linear sensitivity model and does not factor in potential government measures or shifts in global trade partnerships that could cushion the blow.

Morgan Stanley also warned of broader repercussions beyond the immediate GDP impact. Primary effects would stem from a reduction in demand for Indian goods, while secondary effects could ripple through global supply chains, depressing production and possibly leading to job losses. A tertiary impact could come from reduced corporate profits and a deteriorating business climate, potentially hampering future investment.

“In the event that these downside risks persist, we expect policy support to kick in to stabilise growth,” the report stated.

Crucially, the sixth round of India-US trade negotiations, scheduled for August 25, could serve as a pivotal moment. “We will be closely watching geopolitical developments and high-frequency economic indicators,” Morgan Stanley added.