As trade-related talks between India and the US have hit a wall, exporters may have to begin working on long-term diversification strategies, with America having erected the steepest tariff barrier in a century. However, fresh economic data indicates there could be a “second-order” impact on Indian exporters due to a likely slowdown in US demand.
Sensing a deeper challenge for semi-skilled workers, the textile, gems and jewellery sectors have sought COVID-19-era support for the industry to prevent job losses, as nearly 30 per cent of exports from these sectors alone go to the US market.
Crisil Ratings on Tuesday said there will be a second-order impact on the earnings of export-oriented sectors such as diamond polishing, shrimp, home textiles and carpets, which will bear the brunt of US tariffs due to a “structural shift in demand in the US, with reduced discretionary spending driven by expectations of rising inflation”.
High dependence on the US market
According to Crisil estimates, in the last fiscal year, the US accounted for 20 per cent of India’s merchandise exports and 2 per cent of its overall GDP. The 25 per cent reciprocal tariff on India already in effect exceeds those applicable to many competing Asian countries, except China.
“As a result, the diamond polishing, shrimp and home textiles sectors may see sales volumes decline due to high reliance on US trade and costs rise due to partial absorption of tariffs, ultimately affecting their earnings,” the Crisil report said.
The report said that for diamond polishers, exports to the US accounted for 25 per cent of total revenue last fiscal year, and the tariff will also put further pressure on the already modest operating margin of the sector. “Working capital cycles will elongate as inventory moves slowly and customers stretch payment cycles,” the report read.
The US accounts for 48 per cent of revenue for Indian shrimp exporters. With applicable reciprocal tariffs, countervailing duty, and anti-dumping duties in place, India is now one of the highest-taxed major shrimp exporters to the US, the report said, adding that this could drag down export volumes, even as players look for alternative markets to support their exports.
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Home textiles and carpets are both significant export-oriented sectors, with exports accounting for 70-75 per cent and 65-70 per cent of total sales, respectively, for these sectors. Of this, the US accounts for 60 per cent of exports for home textiles and 50 per cent of exports for carpets.
“While there is some tariff advantage currently against China, which is the next largest exporter to the US, the reciprocal tariff will lead to a material decline in revenue and profits for both these sectors, especially given the limited ability to pass on the higher cost due to the discretionary nature of products,” the report stated.
US data indicates possible stagflation
American economist Paul Krugman, who received the 2008 Nobel Prize for Economics, in a Substack post on August 8 said key US data are looking increasingly stagflationary.
He said there is almost complete consensus among economists that tariffs are inflationary, and the only dissenters are economists who work, directly or de facto, for the Trump administration.
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“The only way tariffs could fail to be inflationary is if foreign producers were to slash their selling prices in an attempt to retain their market share. There may be some foreign companies doing this, but for the most part it just isn’t happening,” Krugman said.
Krugman explained that so far there have only been hints of tariff-driven inflation in official data, as US companies rushed to import and stockpile foreign products before the Trump tariffs went into full effect, and are still, to a large extent, selling out of those stocks.
“And if the tariffs are here to stay, we can expect them to be passed on to buyers. We can already see this happening in private surveys of purchasing managers, which have historically been good predictors of official inflation,” he said.
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