"Tariffs Are India's Only Growth Risk Right Now": Says IDFC Chief Economist Gaura Sen Gupta As Trump's tariffs hit exports and bond yields rise at home, IDFC FIRST Bank's Chief Economist Gaura Sen Gupta explains why this could be India's biggest macro stress test in years.

When U.S. President Donald Trump reimposed a 50% tariff on Indian exports this August, it was seen as political theatre — another twist in Trump's America First economics. But by September, it became clear that this was no symbolic move. India's exports to the U.S. had fallen 12% year-on-year, and the Global Trade Research Initiative now expects that decline to widen to 37% in the next two months.

It's a moment that has put India's $4-trillion economy in a precarious position. The world's fastest-growing large economy is suddenly staring at an external shock — one not born of its own making.

And few are reading this moment more closely than Gaura Sen Gupta, Chief Economist at IDFC FIRST Bank, who believes the tariff shock could be the "only real risk" to India's FY26 growth story.

"If the 50% tariffs remain in place for a full 12 months, they can shave off about 1 percentage point from real GDP growth," Sen Gupta tells Entrepreneur India. "It's the single biggest external drag on an otherwise strong domestic recovery."

The tariff trap

The United States remains India's largest export market — buying everything from gems and jewellery to garments and engineering goods. The renewed tariffs, therefore, strike at the heart of India's labour-intensive export base, which employs millions across Gujarat, Tamil Nadu, and Uttar Pradesh.

"Exports in gems and jewellery, leather, textiles, and apparel are the most vulnerable," Sen Gupta says. "These sectors operate on thin margins. A 50% tariff is not something they can absorb."

The irony, she notes, is that the U.S. tariffs are now hurting American importers as much as Indian producers. "The costs are being passed up the chain. U.S. companies are paying higher prices, which will soon reach consumers," she adds.

That, she says, makes a negotiated truce inevitable. "Both sides have an incentive to talk. Given the economic costs, we expect some progress by late November or December."

A Supreme Court case that could rewrite global trade

But while diplomats negotiate, another battle is unfolding — not in New Delhi or Washington's trade office, but in the U.S. Supreme Court.

At stake is whether the President even has the authority to impose such sweeping tariffs under the International Emergency Economic Powers Act (IEEPA). The case, heard this week, could redefine presidential trade powers and in the process, reshape global commerce.

"If the Court strikes down the tariffs, it would be a landmark moment," Sen Gupta explains. "The U.S. government would need to refund around $500 million in duties, and global markets would rally. It would lift a huge cloud hanging over global trade."

The implications for India could be immediate: a rebound in exports, stabilization of the rupee, and a rise in equity market sentiment. "We could see India's FY26 GDP climb back to 7% or higher," she says.

Fed cuts, but India's inflows stall

Paradoxically, while global conditions are softening, India isn't reaping the full benefit. The U.S. Federal Reserve's rate cuts which would typically push capital towards emerging markets haven't translated into a surge of inflows for India.

"FPI flows have returned to emerging markets, but China, not India, is the main beneficiary this time," says Sen Gupta. "In the first half of FY26, India saw nearly zero net inflows, while China saw renewed interest in both equities and bonds."

The reasons are multi-layered:

• Indian markets are relatively overvalued compared to peers.
• The rupee's depreciation has eroded foreign investors' dollar returns.
• Corporate earnings have remained muted in recent quarters.

"It's not a structural exit," she clarifies. "It's a pause. Once corporate profits recover, and earnings visibility improves, capital will return to India."

China's comeback

While India waits for foreign flows to return, China's markets are long battered by real estate troubles and policy overhangs and are showing tentative signs of revival.

"China's equities had corrected so sharply that valuations became attractive," Sen Gupta says. "At the same time, the People's Bank of China has cut policy rates, attracting bond inflows. So, while China's GDP growth is slower, the entry points for investors are better."

She adds a crucial caveat: "India's story remains stronger fundamentally. It's just that investors are doing a temporary reallocation. India will regain traction once earnings turn."

Bond market signals discomfort

Back home, another market is flashing warning signs. Bond yields, which should have eased after the Reserve Bank of India's June rate cut, have instead risen.

"I wouldn't say the RBI is worried, but yes, there's clear discomfort," Sen Gupta explains. "The bond market is grappling with both higher supply and weaker demand."

Government borrowing — both central and state — has risen, while institutional buyers like insurance and pension funds are putting more money into equities. As a result, Sen Gupta estimates, the net bond supply in H2 FY26 will be around ₹8 trillion, up from ₹6 trillion last year.

"And remember," she says, "inflation isn't the issue. It's below 4%. October's CPI could even be as low as 0.2% month-on-month. The problem is that the bond market believes most of the rate-cut cycle is behind us."

The U.S. slowdown: a brewing global ripple

While India manages its domestic challenges, the U.S. economy, the world's demand engine, is showing cracks. With the government shutdown freezing official data releases, economists are piecing together private indicators to assess the slowdown.

"This is the first time post-Covid that labor demand has fallen below labour supply," Sen Gupta points out. "Wage growth is cooling, household savings are below pre-pandemic levels, and household net worth ratios are shrinking. When importers begin passing tariff costs to consumers, U.S. consumption will weaken sharply."

That, she warns, will compel the Federal Reserve to cut rates further, regardless of its current hawkish messaging. "Once data releases resume, the slowdown will be evident. The Fed will have to act."

Domestic resilience

Despite the global crosswinds, India's domestic economy has held firm. Q1 FY26 GDP growth clocked in at 7.8%, powered by consumption, services, and infrastructure spending. Indicators for Q2 are also upbeat — from freight movement to electricity demand and auto sales.

"The domestic story remains resilient," says Sen Gupta. "Private consumption is steady, investment is improving, and inflation is under control. The only real shadow is trade."

She notes that even rural demand once the weak link is beginning to rebound, supported by improved monsoon distribution and government spending ahead of state elections.