Bernstein in its India Strategy note made it clear that the recently announced U.S. tariffs could lead to a significant inflationary impact if they remain in place. The brokerage note highlights the potential economic repercussions and the likelihood of retaliatory measures from affected countries.
According to Bernstein, while some nations like China are expected to announce retaliatory measures, many are likely to engage in back-channel negotiations to ease the situation. The White House has announced exemptions for certain products, including steel, aluminum, copper, pharmaceuticals, semiconductors, gold, and specific minerals not available in the U.S. However, these exemptions are unlikely to mitigate the long-term risk of a possible recession if the tariffs persist and retaliations occur.
Bernstein's analysis indicates that the tariffs are sweeping and significantly high, impacting a broad range of goods. The reference tariff rate used by the U.S. includes non-tariff measures like domestic taxes and currency manipulation, leading to an inflated calculation of tariffs imposed by India on U.S. goods. This results in a 26% tariff on Indian goods, which is higher than the actual tariffs levied by India.
The brokerage notes that the heavy tariffs could have a substantial inflationary impact on the U.S., leading to depressed demand and increased chances of a recession. However, Bernstein believes that the current tariff measures are likely a starting point for negotiations, and many of these rates may not sustain in the second half of 2025.
For India, the 26% tariffs imposed by the U.S. seem high, but key exports like IT services and pharmaceuticals are exempted. This provides some relief, as these sectors are crucial for India's economy. Bernstein suggests that India could potentially benefit from China's loss, as tariffs on Chinese goods are even higher.
In terms of investment implications, Bernstein believes that India will navigate through the tariff challenges and is more likely to engage in negotiations with the U.S. rather than escalating the trade war. The brokerage retains its second-half macro recovery thesis and views a potential trade agreement with the U.S. as a positive long-term development. However, the risk of a weakening U.S. economy and a possible recession remains a concern.
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