Whalesbook
US Tariffs: A Symptom, Not the Disease
A recent analysis by Axis Capital suggests that while trade friction with the United States has been a notable concern for India's export sector, it is not the primary factor dampening growth. Reports of potential trade deals or new tariffs have historically caused market fluctuations. However, the Axis Capital report indicates that actual export performance during September-October 2025, when India faced up to 50% US tariffs, saw only a 3% year-over-year decline, with exports to the US specifically dropping by 10% year-over-year.
This dip was not solely attributable to US trade policies. The report clarifies that India's marine exports, a sector where the US constitutes 30% of the market, actually grew by 17% year-over-year. This suggests that other global and domestic factors play a more significant role in the overall export landscape.
The Twin Threats: China and Capital Costs
The report highlights two overarching concerns that pose a more significant and persistent challenge to India's export competitiveness: the unending surge in Chinese exports to India's key international markets and the globally rising cost of capital. These structural pressures are identified as more critical headwinds than the specific tariffs imposed by the United States. The sheer volume and aggressive pricing of Chinese goods in global markets create intense competition for Indian manufacturers.
Concurrently, an increase in global interest rates makes borrowing more expensive for Indian businesses looking to expand or maintain operations, affecting their ability to invest and compete on price. Axis Capital asserts that while these are significant challenges, they are unlikely to derail India's robust economic growth trajectory.
Sectoral Pressures: Chemicals, Metals, and Textiles
Specific sectors are identified as being particularly vulnerable to these pressures. The chemicals sector, for instance, is experiencing a steady decline in pricing due to what the report terms "China-led low-cost imports." This influx has suppressed earnings growth for bulk chemical companies. Similarly, the metals sector, especially steel, is contending with a surge in low-priced imports that lead to price undercutting. Government intervention, including recommendations for safeguard duties of 11-12%, is being considered to stabilize domestic pricing in this segment.
Indian firms in the textile industry and their intermediate producers, such as those in plastics and chemicals, are struggling to compete in export markets. Their input costs are reportedly too high when benchmarked against Chinese competitors. This competitive disadvantage highlights the need for strategic support and policy adjustments.
Regulatory Tailwinds
Despite the significant challenges, there are positive developments. Regulatory easing, including the rollback of several Quality Control Orders (QCOs) by four ministries on 114 intermediate products, has provided a much-needed tailwind. These products span plastics, chemicals, textile raw materials, and metals. While only a small fraction of affected products have seen relief, this reversal in policy trend is seen as encouraging.
India's Resilient Growth Outlook
Axis Capital reaffirms a strong outlook for India, projecting it to remain the fastest-growing economy with an anticipated 7.5% growth in Fiscal Year 2027. This robust performance is expected to be driven by monetary easing policies. Furthermore, medium-term growth is anticipated to be boosted by broader regulatory reforms, including improvements in ease of doing business, the introduction of new labor codes, and the aforementioned regulatory rollbacks.
Impact Rating: 7/10
Difficult Terms Explained
- Quality Control Orders (QCOs): Government regulations mandating specific quality standards for products. Their rollback can ease compliance burdens for manufacturers.
- HS6 Codes: A standardized system for classifying traded products, used for customs and trade statistics. QCOs are often applied based on these codes.
- Safeguard Duty (SDD): An extra tariff imposed by a country on imports to protect domestic industries from a sudden surge of imports that cause or threaten to cause serious injury.
- China-led low-cost imports: Goods imported primarily from China that are significantly cheaper than domestically produced alternatives, often impacting local manufacturers.
- Front-loading: In this context, it refers to exporting goods earlier than usual to get them into the US market before potential tariff increases take effect.