Context: Global Tariff War Impact
- The U.S., under President Trump, has intensified tariff measures, triggering a global trade war.
- These developments have global macroeconomic implications, prompting central banks to reassess growth projections.
Relevance : GS 3(Economy ,Global Trade)
RBI’s Response & Growth Revision
- RBI revised India’s GDP growth projection for FY25 down by 20 basis points, from 6.7% to 6.5%.
- Reason: Global trade and policy uncertainties resulting from the tariff war.
Why India is Less Affected
- Low export exposure to the U.S.: Exports to the U.S. account for only about 2% of India’s GDP.
- Smaller trade surplus: India’s trade surplus with the U.S. is modest compared to countries like China and Germany.
- Diversified trade basket: India has a broader, more balanced trade strategy, reducing overdependence on any single market.
- Comparisons:
- China: Exports = 19% of GDP
- Germany: 37%
- EU average: 30%+
- Several smaller economies: ~80% of GDP from exports
Inflation Impact: Mixed Outlook
- Tariffs can shrink global demand, which may:
- Ease imported inflation pressures (disinflationary effect).
- But overall, inflation impact is uncertain—RBI more concerned about growth than inflation.
Currency Stability & Resilience
- INR outlook stable: RBI not worried about immediate volatility.
- China may devalue the Yuan in response to U.S. tariffs, but:
- INR will find its own level in the forex market.
- RBI will intervene if excessive volatility occurs.
- Forex reserves at ~$700 billion, offering strong cushion.
- Sustainable fiscal and current account deficits indicate macroeconomic strength.
Strategic Advantages for India
- Lower dependence on trade makes India more insulated from global trade shocks.
- Scope for domestic demand-driven growth rather than export-led, unlike export-heavy economies.
- India may gain competitiveness in global supply chains as firms seek to diversify away from China.
Conclusion: India’s Position
- India is relatively insulated from the full brunt of the global tariff war.
- Challenges remain, but India’s macro buffers (reserves, deficits) and diversified trade strategy provide stability.
- The real concern is global growth slowdown, not direct tariff shocks.
