New Delhi: The US stock markets are in turmoil as the S&P 500 plunges over 10% from its peak last month, driven by President Donald Trump’s trade war. Concerns over a potential US economic recession and stagflation—a scenario of stagnating growth and high inflation due to tariffs—are growing. With the global economy at risk, how does India stand to be affected? Experts weigh in on the implications of US tariffs and a potential slowdown for India’s GDP growth and exports.
US Trade War: A Risk to Global Growth?
Economists see Trump’s aggressive tariff policies as a major challenge for the US economy, leading to higher prices, slower growth, and job losses. The US had shown resilience post-COVID, but Trump’s move to impose 25% tariffs on allies like Mexico and Canada before targeting China with 10% tariffs has created uncertainty.
Sachchidanand Shukla, Group Chief Economist at L&T, points out that the timing of these tariff moves has caught many off guard. “Tariffs disrupt trade decisions, delaying consumption, investment, and economic growth,” he says.
A US recession—typically defined as two consecutive quarters of GDP contraction—could stem from stock market volatility, weakened business sentiment, and falling aggregate demand.
Diane Swonk, Chief Economist at KPMG, notes that tariffs act as a price shock, reducing consumer demand and creating uncertainty for businesses. Meanwhile, DK Srivastava, Chief Policy Advisor at EY India, believes that while the US may face a slowdown, cost-cutting measures and falling energy prices could drive recovery.
Will the US Enter a Recession?
Not all experts agree on an imminent recession. Madan Sabnavis, Chief Economist at Bank of Baroda, argues that Trump’s tariffs are aimed at encouraging local production. He suggests that while tariffs could raise inflation, lower foreign tariffs could boost US exports, mitigating recession risks.
The Trump administration remains unfazed, with Commerce Secretary Howard Lutnick saying a short-term recession would be “worth it” to implement Trump’s policies. Trump himself has described the situation as a “period of transition”, hinting at short-term economic pain for long-term gain.
India’s Stock Market and Economic Outlook
India’s BSE Sensex has plunged nearly 14% from its record high of 86,000, amid global uncertainties, tighter RBI liquidity, and slower-than-expected GDP growth. Yet, Morgan Stanley remains bullish, maintaining a year-end Sensex target of 105,000, expecting India to recover lost ground as fundamentals improve.
Despite a GDP slowdown to 5.6% in Q2 FY25, India remains the fastest-growing major economy, with Q3 growth rebounding to 6.2%.
How Will US Tariffs Affect India?
India faces two key risks:
- Higher US tariffs on Indian goods could reduce exports, as the US is a major export destination.
- If India lowers tariffs on US imports, domestic industries may suffer.
However, Shukla believes that India is less exposed to US trade risks than other economies. Instead, the major concern is the impact on dollar-denominated inflows—portfolio investments and FDI, which could weaken the rupee and affect economic stability.
India’s Response: Domestic Demand and Policy Strength
DK Srivastava (EY India) suggests that policymakers can offset external risks by stimulating domestic demand, particularly through infrastructure investments. Lower global energy prices could also benefit India’s economy.
Is India Well-Positioned?
In a global slowdown, India remains resilient. With China facing deflation and Europe grappling with economic challenges, India’s 6-6.5% GDP growth remains achievable.
Shukla highlights India’s fiscal and monetary policy strength, pointing to increased government capital expenditure and RBI’s liquidity measures as key drivers of economic stability.
Conclusion
While the US economic slowdown and Trump’s tariffs pose risks, India’s domestic-driven growth model, policy interventions, and strong fundamentals provide a buffer. With strategic fiscal policies and sustained reforms, India is well-positioned to navigate global disruptions and maintain its economic momentum.
