A reduction in US reciprocal tariffs on Indian goods to 18 per cent from 25 per cent marks a relatively smooth landing for Indian exporters, ratings agency Icra said, improving landed-cost competitiveness for several labour-intensive sectors even as global trade dynamics remain fluid.
The reset, formalised in a recent US-India joint statement, lowers duties from the elevated levels seen in 2025. In addition, subject to the conclusion of an Interim Agreement, reciprocal tariffs imposed by the United States on select Indian goods, including generic pharmaceuticals, gems and diamonds, and aircraft parts, would also be removed. An additional ad valorem duty of 25 per cent on Indian imports, introduced in August 2025 in lieu of Russian oil imports by India, has also been eliminated under an Executive Order issued by the US President.
Icra said the downward revision would particularly aid labour-intensive export segments such as textiles, cut and polished diamonds, seafood and footwear by improving their landed-cost competitiveness in the US market. However, it cautioned that while sentiment has improved immediately, higher export volumes and margin recovery are likely to unfold with a lag, depending on how quickly contracts with US buyers are renegotiated and how US demand evolves.
“The sharp increase in US tariffs last year had been particularly debilitating for export-oriented companies in sectors such as textiles, cut and polished diamonds, and leather and leather products. Apparel exporters, for instance, saw their margins compress by nearly 200 basis points over the past couple of quarters as they were compelled to extend discounts to US buyers to retain volume share. Likewise, polished diamond exporters sought to minimise tariff-related frictions by reorganising their supply chains to reach US buyers while compromising their working capital cycles, with shipment timelines lengthening by around 30 days. Against this backdrop, the lowering of US tariffs, as a prelude to the formal signing of the US-India trade agreement in due course, as also the anticipated implementation of the India-EU free trade agreement next year, besides other bilaterial trade pacts, augur well for a gradual strengthening of India’s manufacturing export growth over the medium term,” Jitin Makkar, Senior Vice President and Group Head – Corporate Ratings at Icra Limited, said.
Reflecting the improved tariff environment, Icra has revised its outlook on India’s apparel exports sector to Stable from Negative. India’s apparel exports stood at USD 16 billion in FY2025, with the United States accounting for around one-third of the total, underlining the importance and relative profitability of that market for Indian exporters.
The outlook had been cut to Negative in September 2025, when Icra projected a decline in apparel exports, in Rs terms, of 6–9 per cent in FY2026 and a further 4–6 per cent in FY2027 if elevated tariffs persisted. With US tariffs now lowered, export revenues are still expected to contract in FY2026, but by a more moderate 3–5 per cent. Revenues are then projected to rebound by 8–11 per cent in FY2027.
Operating profit margins, expected to compress by about 200 basis points to around 7.7 per cent in FY2026, are likely to recover to roughly 9.5 per cent in FY2027, supporting the restored Stable outlook.
In contrast, Icra has maintained a Negative outlook on the cut and polished diamonds sector, despite the prospect of tariff removal once the Interim Agreement is concluded. The agency said the sector continues to grapple with structural challenges, notably the growing consumer acceptance of lab-grown diamonds, which has hurt both volumes and prices of natural stones.
India’s diamond exports peaked at USD 24 billion in FY2022 but are projected at around USD 12 billion in FY2026, reflecting a sharp demand downturn. Average realisation per carat has slipped to about USD 725 in the first nine months of FY2026, declining at a 7 per cent compound annual growth rate over the past three years.
Icra expects natural diamond exports to grow by 6–8 per cent in FY2027, supported by potential tariff removal, a bottoming-out of prices, the introduction of BIS labelling to distinguish natural diamonds from lab-grown stones, and a pick-up in restocking. However, exports will remain substantially below the FY2022 peak, keeping earnings constrained and justifying the continued Negative outlook.
Over the longer term, Icra said geographical diversification would emerge as a key risk mitigation strategy for exporters. This may involve building a more diversified customer base and investing in overseas manufacturing or partnerships to create a globally diversified production footprint, even at the cost of near-term margins, as companies hedge against an increasingly volatile and geopolitically influenced trade environment. |
