Tariff hikes by US may pose threat to India’s exports but services tax surplus, robust remittances to provide comfort: CRISIL

CRISIL in its latest report, has highlighted that the tariff hikes proposed by Donald Trump may pose a threat to India’s exports, but the country’s surplus in services trade and robust remittances flow may provide comfort.

The report stated that India’s export sector is navigating multiple challenges, including geopolitical uncertainties, which could pose risks to its export performance. It said the surplus in services trade and robust remittance flows provide some comfort and should help keep the current account in a safe zone.

The report highlighted that the fiscal year began positively, with steady growth in merchandise exports during the first quarter. However, the momentum faltered in the second quarter, as exports contracted. However, the situation improved in October, when merchandise exports staged a remarkable comeback, growing at 17.3% year-on-year, the fastest pace in 28 months.

This rebound followed a meagre 0.5% growth in September and an average contraction of 5.8% in July and August. In October, India’s exports surged to $39.2 billion, driven by robust growth in core exports (27.7%) and the gems and jewellery sector (8.7%). The key contributors within the core segment included engineering goods, electronic goods, chemicals, textiles, marine products, and rice. However, oil exports contracted during this period. Despite this recovery, sustaining the growth remains a concern amid external pressures.

The report also mentioned that U.S. tariffs on Chinese imports, combined with China’s economic slowdown, have intensified competition in Asian markets, including India. This has led to aggressive exports from China, adding pressure on India’s trade balance. The United States has announced tariff hikes on Chinese imports (and more could follow with Trump coming in as the new President).

Coupled with the slowdown in the Chinese economy, this is triggering aggressive exports from China to Asian markets, including India. Additionally, growth in imports this fiscal year has outpaced exports, widening the trade deficit, a trend that warrants close monitoring. The report outlined that India’s services trade surplus and strong remittances will continue to provide stability while the merchandise trade deficit remains a concern. These factors are expected to keep the current account within a safe zone.