Key Points

ICRA flagged the urgent need for signing of bilateral trade agreement (BTA) between India and the US to avoid long-term setbacks in one of India's most crucial export sectors.

The US announced new tariffs on July 31, effective August 7, as part of the broader reciprocal measures and also threatened potential penalties linked to India's crude and defence imports from Russia.

US tariff rate of 25 per cent against India is higher than that faced by other major Asian exporters like Japan (15 per cent), Vietnam (20 per cent), and Indonesia (19 per cent), putting Indian exporters at a relative disadvantage.

ICRA noted that around 30 per cent of the Indian auto component industry's revenues come from exports, with 27 per cent of that headed to the US. As a result, nearly 8 per cent of total production in this sector is directly exposed to the new tariff regime of U.S.

"Tariffs at 25 per cent for Indian auto components are significantly higher compared to those on Japanese and European exports," the report stated. "This places Indian exporters at a strategic disadvantage, especially as Canada and Mexico remain exempt under USMCA."

The report highlighted that the competitive pressure is likely to intensify, prompting Indian firms to diversify into non-auto sectors, seek alternative markets, and initiate cost-optimisation measures. Exporters heavily reliant on the US are already exploring new geographies across Asia and beyond to de-risk their operations.

Despite being at a marginal advantage compared to China, which faces a 30 per cent US tariff, Indian firms are unlikely to benefit unless a comprehensive trade agreement is reached soon. "While this may open long-term opportunities, the near-term uncertainty is acute," the report cautioned.

The ICRA report underscored the broader impact of the US tariff policy on India's GDP, revising the country's FY2026 growth forecast downwards by 20 basis points to 6 per cent. It warned that further penalties, yet to be quantified, could exacerbate this downside.

Besides auto components, other key sectors like textiles, cut and polished diamonds, tyres, and non-ferrous metals are also expected to feel the pinch due to the higher-than-expected tariff announced by U.S.

However, exemption to pharmaceuticals and petroleum products, offers some relief.

The report noted that a bilateral trade agreement between India and the US, is not just important but also critical for India's exports. Without it, India risks losing its strategic edge in several high-value export categories, with auto components topping the list.

- ANI