September, 2025

Pressure tactics

Mohit Dugar, CFA

The US is using all types of tactics to exert pressure on India so that they open up their economy as per US’ liking. They first imposed 25% tariffs which began on 7th August, 2025 – the economy took a hit, but it pretty much absorbed this shock. Then came another pressure tactic – 25% penalty over and above the tariffs announced, to make India bow down to US demands which came into effect on 27th August, 2025 due to India’s dealings with Russia. India has been very resilient and has stood its ground.

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The economy is still recovering from this penalty, however, there isn’t much impact. The major export of India is not any goods, it is the services (mainly, IT services) that brings the major forex revenue and that is beyond the ambit of tariffs. India is not overly dependent on US’ exports unlike some other economies like, Vietnam, Japan, China etc. US’ share in India’s total exports is around 20% (US$ 87B), out of which only 2% are goods exports. Top goods exports like, Electronics, Pharmaceuticals are already exempt under the tariffs, which leaves industries like, Textiles, Gems & Jewellery, Chemicals etc. reeling under pressure from such tariffs. This tariff impacts less than 1% of our GDP as India has a very strong domestic consumption base and Indian companies have diverse revenue sources with US driving less than 10% of the revenue of the Indian listed universe. The following table gives a clear picture:

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The biggest asset for India has been the domestic consumption, which can absorb all the excess demand – the Government has also realised the same and is working actively to boost the consumption with a wide array of reforms being undertaken:

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1. No income tax on earnings up to ₹12 lakhs, which comes into impact from this fiscal year.
2. 8th pay commission which will lead to earnings increase of up to 40% for Government employees which comes into effect from 1st January, 2026.
3. GST rate rationalisation – merging all slabs into just two slabs: 5% and 18% (with a 40% slab for luxury and sin goods).

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In the GST Council meeting recently undertaken, sweeping changes were approved regarding rate rationalisation - a two rate structure (5% and 18%) has been adopted, this will make the indirect tax system simpler and will be a big boost to the economy just before the festive season. This move could cost the exchequer around ₹85,000 crore, but on the other hand, it could fuel consumption to the tune of around ₹2 lakh crore or a 1.6% boost to the GDP, effective from 22nd September onwards. The table below provides a snapshot of the current as well as new GST rate structure:

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The macro-economic conditions also support the current Government stance:

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1. Inflation has cooled down to 1.6% - 8 year low. Mainly driven by cheap Russian crude imports.
2. Sovereign ratings upgrade from BBB- to BBB – reflecting strong structural integrity even in such uncertain times.
3. Q1FY26 GDP growth at 7.8% - beats estimates.
4. Above average rainfall.
5. Rural demand revival: Green shoots visible.
6. PMI at 17.5 year high.
7. Strong domestic inflows countering FPI outflows.

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In the MPC meeting, RBI kept the rates steady waiting for more clarity post tariffs taking full effect. They have also kept their stance as neutral. However, the time is ripe and US FED chair has also indicated the possibility of a rate cut in the upcoming meeting in September – an event to look out for as this could be the catalyst that fuels the EM markets.

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Till the time uncertainties persist, safe-haven assets will continue to thrive – Gold at an all-time high crossing ₹104,000 per 10 gm, Silver also at an all-time high crossing ₹122,000 per kg. Due to the tariff uncertainties INR took a dive and went to an all-time low level of 88.26 INR/USD.

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The US administration is trying their level best to exert pressure on India. So far, India has refused to open up their dairy sector, they have refused to stop the purchase of cheap Russian crude, they have refused to purchase F-35 fighter jets. India is standing up and showing strength, all the structural signals stay strong and long-term fundamentals tell just one thing – stay invested.

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Every storm brings an opportunity – this one can open new markets for India, give a boost to ‘Make in India’ and also make India self-reliant in many sectors. If India plays its cards right, this could be the next big inflection point that could pivot it towards its goal of becoming a developed economy by 2047.

www.pinnaclefinvest.com

mohit@pinnaclefinvest.com

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