India may emerge as a significant beneficiary of the evolving global trade landscape due to potentially lower US tariffs compared to many other Asia-Pacific (APAC) nations, according to a recent assessment by Moody's Ratings. This advantageous position could make India a more attractive destination for global investment, fostering its development as a major manufacturing hub.
Moody's notes that many export-reliant APAC economies faced high US tariffs in April. While negotiations may lead to some tariff reductions and eased trade barriers bilaterally, the uncertainty surrounding trade policies poses challenges to investment decisions and disrupts trade. However, India's situation appears more favorable in this context.
The ratings agency highlights that India has the potential to benefit from tariff-driven shifts in investment and trade flows. Lower tariffs could make exporting goods from India more competitive, thereby attracting further investment flows and supporting the country's ambition to become a global manufacturing base. The signing of a Free Trade Agreement (FTA) with the UK in May, along with ongoing negotiations for an FTA with the European Union, could further bolster India's manufacturing prospects.
However, Moody's also points out a potential challenge: the United States' efforts to reshore select manufacturing sectors could limit the extent to which India benefits. Moreover, shifts in investment and trade flows stemming from tariffs are expected to materialize over several years. Multinational companies are unlikely to make drastic investment changes while significant uncertainty persists regarding the magnitude and duration of tariffs. Companies will likely slow or pause ongoing investments, awaiting a steady state in trade policies. Even then, relocating manufacturing or product sourcing will take years to execute.
It's worth noting that on April 2, the US imposed an additional 26% reciprocal tariff on Indian goods but suspended it for 90 days. However, the baseline 10% tariff imposed by the US remains in place. India is currently seeking a full exemption from the additional 26% levy. Indian and US officials are reportedly in negotiations for a proposed interim trade agreement. India seeks greater market access for its labor-intensive goods, while the US desires duty concessions for its agricultural products. These talks are particularly important as the suspension of US reciprocal tariffs is set to end on July 9.
In a previous report in May, Moody's suggested that India's economy is unlikely to be significantly affected by US tariffs or global trade problems, citing the country's strong domestic demand and limited dependence on goods exports. Government initiatives to boost private consumption, expand manufacturing capacity, and increase infrastructure spending will help offset the weakening outlook for global demand. Easing inflation offers potential for interest rate cuts to further support the economy, even as the banking sector’s liquidity facilitates lending.
