The Trump tariff war, has the Indian stock market become the biggest loser?

As trade friction casts a shadow over the global market, India seems to be the most affected player in this game.

Under the threat of the United States significantly raising tariffs to 50%, Indian companies are facing the most severe earnings forecast downgrades in Asia. Analysts have sharply reduced their earnings expectations for Indian companies, highlighting the impact of trade tensions on this third-largest economy in Asia.

According to the latest data from LSEG IBES, in the past two weeks, the earnings forecasts for medium and large Indian companies for the next 12 months have been downgraded by 1.2%, the largest decline in Asia.

Although the Indian economy is primarily driven by domestic demand, with only 9% of the revenue of Nifty 50 index constituents coming from the U.S. market, the threat of tariffs still poses a significant risk to economic growth. To address this challenge, Indian Prime Minister Modi recently announced a large-scale tax reform plan.

The latest Bank of America fund manager survey shows that the status of the Indian stock market has dramatically reversed in just two months, falling from the most favored Asian market to the least popular.

Tariff Shockwaves Affect Economic Growth

According to MUFG institutional analysis, if the U.S. continues to impose a 50% tariff on Indian goods, it could reduce India's GDP growth rate by 1 percentage point, with labor-intensive industries such as textiles being the most affected.

Raisah Rasid, a global market strategist at JP Morgan Asset Management, stated, "Given the tariffs imposed on India, this is indeed an interesting time." She pointed out that although valuations remain high, tariffs could trigger a broad re-rating of valuations.

Previously, CCTV News reported that U.S. President Trump signed an executive order on August 6 local time, imposing an additional 25% tariff on goods from India under the pretext of Indian imports of Russian oil, bringing the total tariffs faced by Indian exports to 50%.

Corporate Earnings Remain Weak

Indian corporate earnings growth has remained in single digits for five consecutive quarters, far below the growth levels of 15%-25% from 2020-21 to 2023-24. The latest round of earnings forecast downgrades is a response to the poor performance of the quarterly reports for the April-June period According to data, the industries of automobiles and parts, capital goods, food and beverages, and durable consumer goods have the largest forecasted decline in net profit over 12 months, all adjusted down by 1% or more.

Rajat Agarwal, an Asian equity strategist at Société Générale, stated: “After a disappointing 6% profit growth in 2024, the recovery pace in 2025 remains slow, as confirmed by economic growth parameters and corporate earnings.”

Can tax reform be a lifeline?

In the face of trade shocks, the Indian government hopes to stimulate domestic demand by lowering consumption taxes.

A previous article from Wall Street reported that Indian Prime Minister Modi plans to reform the Goods and Services Tax, aiming to reduce and simplify the four tax brackets of 5%, 12%, 18%, and 28% into two brackets of 5% and 18%, to boost the economy while addressing tariff shocks.

Economists at Standard Chartered Bank expect that this tax reform will contribute 0.35-0.45 percentage points to GDP growth in the fiscal year 2027.

India's average real GDP growth during the fiscal years 2022-2024 is 8.8%, the highest in the Asia-Pacific region. The average growth rate is expected to reach 6.8% over the next three years. However, under the shadow of the trade war, this growth outlook faces challenges