The imposition of 25% tariff on import of goods from India into the United States (US) will have a significant impact on the earnings of companies in sectors such as diamond polishing, shrimp, home textiles and carpets. Additionally, the move to impose an additional 25% tariff with effect from August 27, 2025 as a penalty for importing crude oil from Russia will make Indian exports to the US unviable for the aforesaid as well as other sectors including ready-made garments (RMG), chemicals, agrochemicals, capital goods and solar panel manufacturing, which have sizable trade exposure to the US.

The extent of impact will vary depending on exposure, ability to pass on incremental costs to customers, and relative tariff disadvantage versus competing nations. A potential second-order impact, including a slowdown in US demand and disparate tariffs across nations that could alter trade dynamics globally, also warrants close monitoring. Any potential trade agreement between the two nations in the coming days will bear watching.

That said, strong corporate balance sheets, potential bilateral trade agreements with other countries and the possibility of support from the Indian government for the impacted sectors could mitigate the credit impact to some extent.

Pursuant to the Executive Order issued by the US, effective August 7, 2025, a 25% reciprocal tariff is applicable to goods¹ imported from India. Furthermore, the US has levied an additional 25% tariff as a penalty, resulting in a total tariff of 50%, which will come into effect on August 27, 2025. These tariffs are in addition to the most-favored-nation² tariff (ranging between 0-14% for the impacted sectors), which is already in place.

To be sure, last fiscal, the US accounted for ~20% of India's merchandise exports and ~2% of its overall GDP.

The 25% reciprocal tariff on India already in effect exceeds those applicable to many competing Asian countries except China. As a result, the sectors mentioned earlier - diamond polishing, shrimp and home textiles sectors - may see sales volume decline due to high reliance on US trade and costs rise due to partial absorption of tariffs, ultimately affecting their earnings.

 For diamond polishers, exports to the US accounted for ~25% to total revenue last fiscal. The reciprocal tariff, along with the already tepid demand for natural diamonds in the US and growing demand for lab-grown diamonds will lead to a sharp dip in revenue. The tariff will also put further pressure on the already modest operating margin of the sector due to reduced fixed-cost coverage and the onus to bear the higher tariff cost, as retailers in the US have shown limited inclination to take on the burden. Working capital cycles will elongate as inventory moves slowly and customers stretch payment cycles.

The US accounts for ~48% of revenue for Indian shrimp exporters. With applicable reciprocal tariffs, countervailing duty, and anti-dumping duties in place, India is now one of the highest-taxed major shrimp exporters to the US. This could drag down export volume, even as players look for alternative markets to support their exports. Also, the sector operates on thin operating margin which will be further eroded by the imposition of tariff due to the added cost burden and limited pass-through ability due to stiff competition from Ecuador, which benefits from lower tariffs.

Home textiles and carpets are both significant export-oriented sectors with exports accounting for 70-75% and 65-70% of total sales respectively for these sectors; of this, US accounts for ~60% of exports for home textiles and ~50% of exports for carpets. While there is some tariff advantage currently against China, which is the next largest exporter to the US, the reciprocal tariff will lead to a material decline in revenue and profits for both these sector, especially given the limited ability to pass on the higher cost due to the discretionary nature of products.

For other sectors such as ready-made garments (RMG), agrochemicals, specialty chemicals, capital goods, etc., the impact of the 25% reciprocal tariff is likely to be more manageable, considering moderate exposure to the US (5-20% of overall revenue) and limited tariff disadvantage that will allow companies to partly pass on the impact to customers. However, the additional 25% tariff will have an adverse impact on all the sectors.

For the RMG segment, exports to the US form 10-15% of total revenue and will become completely unviable as the tariff structure will be significantly higher than that of competing manufacturers in China and Vietnam.

Agrochemical exports to the US, which account for 11-12% of the sector's revenue, will also face challenges, with China being a key competitor and major supplier of agrochemicals to the US. The ability of Indian companies to divert products to alternative markets such as Brazil and other Latin American countries will be limited by the presence of strong Chinese competition there.

The specialty chemicals segment has low exposure to the US, at ~5% of total revenue. Here, the ability to pass on the tariffs would be limited as the sector is only just witnessing a return to normalcy after profitability pressures due to tepid demand compounded by continued Chinese dumping and inventory correction by suppliers over the past two fiscals.

For capital goods manufacturers, the revenue exposure to the US is ~15%. The sector is dominated by large, well-established players with proven technical know-how and longstanding customer relationships, which will enable them to pass on some of the tariff impact for existing orders. However, fresh order bookings will see a significant impact as India faces stiff competition from other countries. For instance, Mexico holds a prominent position in the US's import basket and has a significantly lower tariff structure.

For India's solar panel manufacturing industry, volume growth and operating profitability are unlikely to be significantly impacted, as exports to the US account for only 10-12% of overall sales volume. This share is expected to decline this fiscal, driven by growing domestic demand.

Additionally, while certain sectors, such as pharmaceuticals and smartphones, have substantial trade exposure to the US, they are currently exempt from tariffs. Meanwhile, the tariff rates for other sectors, including steel, aluminum and certain automotive components, remain unchanged at present. Any modifications to these rates will be closely tracked.

There will also be a second-order impact on earnings in these and other sectors. This may manifest as a structural shift in demand in the US, with reduced discretionary spending driven by expectations of rising inflation. Furthermore, the imposition of tariffs on multiple countries poses a risk that competing nations will redirect their sales to other countries, including India, which could negatively impact the earnings of domestic companies in sectors such as steel, chemicals agrochemicals, until global demand and supply rebalance. However, potential bilateral agreements with other key trading partners and the imposition of safeguard duties by the Indian government, as seen in the past, should limit this impact.

All said, any potential trade deal between the US and India in the coming days will remain monitorable. Also, any support measures from the Indian government to safeguard the tariff-impacted sectors will play an important role. Plus, the tariffs come at a time when corporate balance sheets have strengthened significantly, which could cushion the credit impact.

Crisil Ratings will continue to closely monitor the situation and keep evaluating the impact on the credit risk profiles of its rated companies. Rating actions, if any, will be announced on a case-to-case basis, as deemed necessary.

¹ Except for goods covered under Section 232 of the Trade Expansion Act, 1962 of the US
² Non-discriminatory tariff charged on imports from partner countries part of the World Trade Organisation