Through the headlines and hectic diplomacy, the Indian stock market and currency have been relatively stable and the country's central bank barely reacted, keeping its rates and economic growth forecast for the year unchanged.
At 6.5% GDP growth, the Reserve Bank of India expects the the world's fifth-largest economy to grow the fastest among major economies this year.
But private economists are less sanguine and see an up to 60 basis points direct hit to GDP growth as India's $86 billion in goods exports to the U.S. are expected to suffer a sharp fall.
This could, in turn, require the government to support the export sector, which employs millions.
"If there is no swift resolution, then there could be demand from exporters for some targeted fiscal support," said Samiran Chakraborty, chief India economist at Citibank, adding that the cost of such support is difficult to gauge at this stage.
A credit guarantee scheme to help tide over a period of business disruption for small businesses and exporters is under consideration, Reuters reported on Monday.
A second-order impact could also play out as businesses look to protect their own revenues in ways that may be detrimental for the broader economy.
Indian firms in the textile and jewelry sector - which are among the largest exports to the U.S. - are already facing requests to move production lines to overseas destinations to bypass the high tariffs.
"All the customers are already calling me. They want us to ... shift from India to the other countries," Pallab Banerjee, managing director of textile manufacturing firm Pearl Global told Reuters in an interview. Read that report here.
Indian jewelry firm Titan is considering moving some of its manufacturing to the Gulf, to maintain access to the U.S. market. Read here for more on the company's plans.
"Beyond 2025, the much wider tariff gap compared with other Asia-Pacific countries would severely curtail India's ambitions to develop its manufacturing sector," Moody's Ratings warned in a note last week.
Any hit to India's manufacturing sector will hurt jobs and weigh on consumption, which accounts for 60% of India's economy.
India's federal government cut personal income taxes earlier this year as signs of weakening demand emerged and the central bank has reduced interest rates by 100 basis points already, with limited room for further cuts.
As such, the onus to provide a boost to the economy towards the 8% "aspirational" growth rate laid out by the central bank recently may fall on tougher-to-do reforms.
"For the next leg of growth, perhaps it is time to look beyond monetary and fiscal support, and focus on structural reforms, in order to reach "aspirational" levels of growth," HSBC's chief India economist Pranjul Bhandari wrote in a report last week, citing efforts to sign more trade pacts, welcome foreign direct investment and improve the business environment across states.
What fault lines do you see emerging in the Indian economy as it faces higher tariffs from the U.S? Write to me at ira.dugal@thomsonreuters.com.
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