India poised to weather US tariffs and global trade disruptions: Moody’s

India’s large domestic economy, low dependence on exports, and government initiatives to boost private consumption, expand manufacturing capacity and increase infrastructure spending will help offset global trade risks, supported by easing inflation and strong banking liquidity, said Moody’s Ratings on Wednesday.

In its report on emerging markets—in which Moody's concluded India's internal growth drivers anchor the economy amid US policy shifts and global uncertainty—it noted that recent tensions between Pakistan and India, including the May flare-up, are likely to have a greater negative impact on Pakistan’s growth than on India’s.

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"The central government's infrastructure spending supports gross domestic product (GDP) growth, while personal income tax cuts bolster consumption. India's limited reliance on the trade of goods and its robust service sector are mitigants to US tariffs," it said.

“India-made goods may even benefit from increased US demand if trade talks lead to lower tariffs on India compared to other emerging markets. Despite global volatility, India's sound banking market and stable credit conditions underscore its economic strength,” it added.

However, Moody’s warned that a further deterioration in global economic and credit conditions would have knock-on effects on India.

Meanwhile, the rating agency expected strong demand for power, transportation, and digital infrastructure to continue to attract significant capital investments in the South Asian country over the next five to seven years.

“The effects of US tariffs will likely be muted for most infrastructure sub-sectors as they cater mostly to domestic demand and benefit from supportive regulatory or contractual arrangements,” it said.

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“Ports are more exposed to earnings decline among infrastructure segments, but Indian ports are less susceptible because they mainly serve domestic requirements,” it added.

Tariff strains

In April, the Donald Trump-led US administration imposed a 27% ‘reciprocal’ tariff on Indian goods, citing India’s average 52% tariff on US imports, adding pressure on trade, currency, and capital flows.

However, on 9 April, it eased duties on several partners, including India, cutting the tariff to 10%.

For India, the challenge lies in managing near-term disruptions while positioning for long-term gains.

The move comes amid slowing economic momentum. GDP growth rebounded to 6.2% in Q3FY25, but reaching the National Statistics Office (NSO)’s full-year target of 6.5% will require 7.6% growth in Q4—an uphill task given weak demand and global uncertainty.

“India is better positioned than many other emerging markets to deal with US tariffs and global trade disruptions, helped by robust internal growth drivers, a sizable domestic economy and a low dependence on goods trade,” the Moody's report said.

“Significant government investments will bolster sectors from infrastructure to manufacturing, at a time that rapid urbanisation and a young population are underpinning structural demand for housing and consumer goods,” it added.

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Moody's said easing inflation offers the potential for interest rate cuts to further support growth, while India-made goods may even benefit from higher US demand if trade negotiations result in lower US tariffs on India compared to other emerging markets, as was the case in the schedule of “reciprocal tariffs” announced on 2 April.

“Nonetheless, sectors such as autos, which have some exports to the US, face global trade challenges despite their diversified operations,” it said.

Geopolitical tensions 

Moody's also said persistent tensions, such as the recent escalation between India and Pakistan, have been accounted for in its geopolitical risk assessment.

“In a scenario of sustained escalation in localised tensions, we do not expect major disruptions to India's economic activity because it has minimal economic relations with Pakistan,” it said.

“Moreover, the parts of India that produce most of its agricultural and industrial output are geographically distant from the conflict zones,” it added.

However, the rating agency cautioned that higher defence spending would potentially weigh on India's fiscal strength and slow its fiscal consolidation.