In Splendid Isolation

Or India's economic chess against twin US economic threats

As global economic headwinds intensify following the imposition of sweeping US tariffs, India finds itself in a relatively advantageous position compared to its Asian peers, though challenges remain substantial. The country faces the dual test of weathering the impact of a potential US recession while managing the effects of a 27% reciprocal tariff rate from its largest export destination.

Concern about the health of the American economy is rising. Major Wall Street banks have significantly increased their forecasts of a US recession, pointing to President Trump’s trade policies as a key risk. JP Morgan raised its recession probability estimate to 60% last week, calling the administration’s tariff increases “the largest US tax hike in nearly 60 years.”

Goldman Sachs is similarly concerned, lifting its 12-month recession probability to 45% and cutting its forecast for US GDP growth in late 2025 to just 0.5%. For its revised projection, Goldman cites a combination of tighter credit, potential consumer boycotts overseas, and general policy uncertainty for threatening US growth.

India’s economy has often followed its own path, showing less correlation with the American business cycle than many other countries. In the past, Indian growth has tended to bottom out before sharp contractions in the US.

This was evident during the 2008-09 global financial crisis, when India avoided recession, and again during the pandemic, when it recovered more strongly than many developed nations. A key reason is India’s large domestic market: consumption makes up about 60% of GDP, buffering the economy against swings in global demand. A lower historical reliance on exports also helps during global slowdowns.

This time, however, India faces the direct impact of US tariffs alongside the recession fears. The US has applied a 27% reciprocal tariff rate on Indian goods. This rate is based on a US calculation of India’s own import duties that many analysts dispute, arguing the actual weighted average is closer to 10%. Although India’s rate is lower than those applied to competitors like Vietnam (46%) or China (54%), it still presents a challenge.

There are already early signs of pressure within India: growth reported by listed consumer-staples firms has slowed, and fast-food chains have seen same-store sales decline. In the payments sector, while digital transactions are growing rapidly, credit card spending growth has moderated – a common sign of consumers becoming more cautious.

Still, there are mitigating factors. Washington has exempted several important Indian export categories from the tariffs, including pharmaceuticals (which account for over 10% of goods exports to the US), certain chemicals, and electronics. Analysts at Bank of America believe these exemptions could cover $6-8 billion of India’s $80.7 billion annual goods exports to the US. The Indian government has also so far pursued a strategy of negotiation rather than immediate retaliation, unlike the European Union. Officials are said to view the situation as complex but not necessarily a major setback, according to local media reports.

The impact on Indian companies could vary. Indian IT services companies, with their significant exposure to North American clients, have historically served as early indicators of US economic health, with their performance across previous downturns providing valuable context for assessing current risks.

During the global financial crisis of 2008-09, the impact on India’s IT sector was severe but temporary, with Bernstein’s analysis showing that large caps had longer recovery cycle (3-4 quarter decline) as “revenue growth decelerated by 15+ QoQ percentage points for large IT Services firms,” specifically noting that “TCS revenues declined -6% in Q4CY08” while “Infosys declined 4% in Q4CY08/Q1CY09.”

Market valuations during this period reflected the earnings deterioration, with IT services contracting from their premium multiples (Indian IT ~25x & Accenture ~19x vs. ~15x market pre-GFC) to “near the depressed market multiple (5-15x)” with “Infosys & Accenture de-rated to 9-10x NTM PE at the lowest point of GFC.”

The COVID-19 downturn presented a different pattern for Indian IT firms, with recovery faster in Covid post the decline in Q1FY21 as tier 1 Indian IT services providers saw a strong rebound post Q2FY21 aided by pickup in demand and easing of supply constraints—a faster recovery that reflected both the unique nature of the pandemic downturn and the digital acceleration it triggered.

The recent cycle (2023-24) has been more gradual, with revenue growth under pressure due to delays in deal ramp-ups and cautious macro/weak discretionary spending, though recent quarters have shown signs of stabilization, suggesting the sector may be better prepared for the current potential downturn than in previous cycles.

Companies in the industrial sector, too, are likely to face limited direct tariff impact. Key exports to the US, like electronics (including mobile phones, where exports are rising partly due to Apple shifting some production), engines, and cables, make up only a small percentage (low single digits) of these firms’ total revenues.

Dixon Technologies, an electronics manufacturer, gets about 5% of its revenue from US exports but expects this to grow as supply chains shift. Engine maker Cummins India and cable firms Polycab and KEI have similar low levels of direct US exposure (around 2-3% of revenue). Goldman Sachs suggests that India’s lower tariff rates could even help these companies gain market share from rivals in China or Vietnam facing higher duties.

The picture is different in the mobility sector. Companies with significant exposure to the US market or global auto industry trends are more at risk. Tata Motors (mainly through its Jaguar Land Rover unit), KPIT Technologies, and Tata Technologies (both involved in auto R&D) could face potential revenue declines of 2% to 16% under different US slowdown scenarios, according to Goldman Sachs. In contrast, domestically focused companies like C.E. Info Systems (mapping), Ashok Leyland (trucks), and Hero MotoCorp (motorcycles) face very little direct impact, estimated at less than 1%.

India’s overall economic outlook remains fairly steady, though Goldman Sachs has slightly reduced its CY2025 growth forecast to 6.1%.

One potential benefit of a US slowdown could be lower global prices for commodities like oil and metals. As a major importer, this would reduce India’s import costs and ease inflation, possibly giving the central bank room to lower interest rates.

Some strategists – including those at Bernstein – also favour domestic sectors like finance, telecoms, utilities, and certain consumer areas for their defensive qualities during uncertain times. However, significant risks remain.

Analysts at Nomura warn that weaker global growth, increased protectionism, and a potential slowdown in domestic investment could pose bigger challenges for India, even as it navigates the current tariff situation relatively well compared to its peers.