The Indian government had been justified in expecting a good outcome from the tariff discussions with the US. President Donald Trump and Prime Minister Narendra Modi appeared to enjoy good relations, while consecutive US administrations in recent years have viewed India as an important ally in the Indo-Pacific region. As a fast-growing emerging economy, there were few competitive clashes between India and the US. However, South Asia’s largest country is now facing some of the highest tariffs in the world – 25% was already in effect at the start of August, and an additional 25% was added on 27 August in response to Indian imports of crude oil from Russia.  

While the high tariffs are unwelcome, the direct impact is expected to be limited. Approximately 80% of the Indian economy is domestically oriented. Overall, Indian goods exports to the US account for just 2% of India’s GDP. Equally, the current tariff regime leaves two high-ticket Indian exports untouched: IT Services, which do not fall under goods-specific imports, and pharmaceutical products, which are exempted for now. There are other sector exemptions as well, such as electronics and semiconductors that are awaiting Section 232 investigations (investigations from the US Commerce Department’s Bureau of Industry and Security). It is estimated that about a quarter of India’s goods exports to the US are currently exempt.  

The real potential risk is in second order effects. If the US economy experiences a slowdown, it may push US companies to reconsider their technology spending which, in turn, would affect their demand for Indian IT services. That could potentially prove to be more disruptive for India. Additionally, the country is not immune to any global supply chain disruptions stemming from these tariffs. It may disrupt the ‘Make in India’ agenda that has relatively worked well to bring international businesses to India. However, for the time being, the US economy appears resilient, and those second-order effects have not materialised.  

Negotiations are ongoing and an agreement to lower the tariffs is still possible. That said, there are challenges around areas such as agriculture: the US wants access to India’s agriculture sector, while the Indian government is fiercely protective because the sector employs nearly 50% of the Indian workforce. In negotiations with other countries, Trump has backed down quickly after securing relatively minor concessions.  

The tariff problem has coincided with a somewhat lacklustre period for the Indian stock market. Although it has seen real strength over the past five years, with an annual growth rate of 19% in local currency terms, the MSCI India is up just 3.6% for the year to date (as at 31 July, in local currency terms). That compares to a gain of over 20% for the MSCI Emerging Markets index and 11.2% for the MSCI World index (in $ terms).  

However, while the temptation may be to conflate the two, tariffs aren’t necessarily the primary cause. The real reasons for the recent weakness are more complex. A lot of India’s recent growth has been driven by public spending on areas such as infrastructure. This is important in creating a more productive economy. However, it has slowed more recently as the Indian government has sought to keep the deficit at manageable levels.  

There has also been some weakness in the Indian consumer economy. Consumption by Indian households has nearly trebled to $2.07 trillion over the past decade. It remains a crucial engine of growth. However, the abundance of labour has kept wages lower, which has slowed consumption growth. Inflation has also been a factor in consumer confidence. In the longer-term, it is hoped that urbanisation, and a move away from agricultural jobs, will reverse the tide. The Government is also about to reform the country’s Goods and Services Tax (GST). Introduced in 2017, it has long been seen as unwieldy. The government is planning a significant simplification, aimed at reducing inflation and encouraging consumption. 

Another problem has been that parts of the Indian market simply got too expensive. The Indian market has long been more expensive than its emerging market peers, a reflection of the country’s strong corporate governance and faster growth. However, certain parts of the market had become frothy, particularly among small and mid-cap companies.   

However, none of these problems are terminal. With inflation now under control, the Reserve Bank of India has steadily injected liquidity into the market since December 2024 and began a rate-cutting cycle in February. It has reduced the headline interest rate by 1% so far this year. On the fiscal side, the government announced a consumer-focused budget for 2026, aimed at boosting middle-income consumption demand.  

There are other initiatives. The government is also emphasising public-private partnerships for infrastructure projects, with the aim of galvanising private capital spending. The ‘Make in India’ manufacturing initiative continues, with increased funding for production-linked incentive schemes encouraging multinationals to establish production bases in India, particularly in high-demand sectors such as smartphone manufacturing.  

These cap a decade of painful and difficult reforms that have left the Indian economy in a far stronger position. India is now a compelling place to do business. Economic growth is still comfortably above 6%, higher than the majority of its emerging market peers, and any deterioration is already factored into market pricing.  

In the meantime, with the froth knocked off valuations, there is an opportunity to buy into long-term, high quality growth companies at a better price. We are finding more compelling value in the small and mid-cap market, for example. The banking sector, infrastructure-related companies, and domestic consumption-focused businesses all offer opportunities in this dynamic market. Nevertheless, there are still pockets of over-valuation, which – in our view – support an active approach to the Indian market. 

The tariff problems may yet be resolved, with negotiations ongoing. Any resolution would contribute to better sentiment towards Indian equities. However, the real improvement may come as the economy starts to feel the benefits from the recent government initiatives to improve the economy.  

India offers a diverse investment universe and is not heavily concentrated in any single sector. It remains home to a wealth of well-run companies with robust balance sheets, stable and predictable cashflows, healthy corporate earnings growth, and competent management teams. Corporate governance continues to improve. Its temporary troubles do not derail the long-term story for India.  

Important information  

Risk factors you should consider prior to investing: 

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested. 

• Past performance is not a guide to future results. 

• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years. 

• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV. 

• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares. 

• The Company may charge expenses to capital which may erode the capital value of the investment. 

• Movements in exchange rates will impact on both the level of income received and the capital value of your investment. 

• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value. 

• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen. 

• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down. 

• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends. 

Other important information: 

The details contained here are for information purposes only and should not be considered as an offer, investment recommendation, or solicitation to deal in any investments or funds and does not constitute investment research, investment recommendation or investment advice in any jurisdiction. Any data contained herein which is attributed to a third party (“Third Party Data”) is the property of (a) third party supplier(s) (the “Owner”) and is licensed for use with Aberdeen. Third Party Data may not be copied or distributed. Third Party Data is provided “as is” and is not warranted to be accurate, complete or timely. To the extent permitted by applicable law, none of the Owner, Aberdeen, or any other third party (including any third party involved in providing and/or compiling Third Party Data) shall have any liability for Third Party Data or for any use made of Third Party Data. Neither the Owner nor any other third party sponsors, endorses or promotes the fund or product to which Third Party Data relates. 

The abrdn New India Investment Trust plc Key Information Document can be obtained here. 

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK. 

Find out more at aberdeeninvestments.com/anii or by registering for updates. You can also follow us on X, Facebook and LinkedIn.