Citi: US Reciprocal Tariffs May Pressure Indian Specialty Chemical Firms

The Indian specialty chemicals sector is facing potential profitability challenges as U.S. President Donald Trump’s proposed reciprocal tariffs could impact exports, according to Citi Research. These tariffs are expected to disrupt trade flows and could pressure margins for Indian chemical manufacturers that rely on exports to the U.S. 

Currently, Indian exports of organic and miscellaneous chemicals are subject to a 10% tariff, significantly higher than the 3% average tariff imposed on similar products in the U.S. Other key chemical exports to the U.S. and European Union face tariffs ranging from 5% to 6%, making Indian exports relatively more expensive in international markets. 

Invest in Indian Markets and Unlock Future Potential With 5paisa!

Open Account Now

If a 7% tariff is introduced on Indian specialty chemicals exported to the U.S., Citi Research estimates that the EBITDA impact will be substantial, with PI Industries facing a 12% decline, Navin Fluorine a 5% drop, and SRF seeing a 4% reduction. These figures highlight the varying degrees of vulnerability among Indian chemical companies, depending on their exposure to the U.S. market and their ability to pass on costs to buyers.

Following these developments, Indian specialty chemical stocks reacted negatively in early trading. At 9:30 AM, PI Industries stock price had fallen by 1.3% to ₹3,124, while Navin Fluorine’s stock declined by 1% to ₹4,045.8. SRF shares were trading at ₹2,735.9, reflecting a 0.2% decline compared to the previous close on the National Stock Exchange (NSE). 

This immediate market reaction indicates investor concerns about the potential revenue and profitability impact on these companies. However, Citi Research also pointed out that the actual impact of the tariffs might be lower than estimated. This is due to possible offsets resulting from tariffs on other exporters to the U.S., which could help maintain demand for Indian chemical exports. 

Additionally, price adjustments in the U.S. domestic market could absorb some of the increased costs, reducing the financial burden on Indian exporters.

While the U.S. tariff situation presents challenges, Indian chemical companies have the opportunity to expand their presence in the European market, as noted by analysts at Nuvama Institutional Equities. However, Europe’s chemical industry faces its own set of difficulties, including weak domestic demand and oversupply from China, which has intensified price competition. 

Despite these challenges, India’s small-molecule pharmaceutical research industry has been capitalizing on shifting European market dynamics, benefiting from regulatory changes that favor non-European suppliers. Similarly, the Indian agrochemical sector has been gaining traction in Europe, supported by policies that encourage Indian exports. 

This trend suggests that, despite U.S. trade barriers, India’s specialty chemicals industry may find alternative growth avenues in the European market, helping mitigate some of the negative effects of U.S. tariffs.

Impact on Other Sectors

US Exports to India

In 2024, US manufacturing exports to India were valued at $42 billion. However, these exports encounter significantly higher tariffs, which range from 7% on wood products and machinery to 15-20% on footwear and transport equipment, with food items facing nearly 68% tariffs. According to the White House, the US applies an average Most Favored Nation (MFN) tariff of 5% on agricultural products, whereas India imposes a much steeper 39%. Additionally, US motorcycles entering India are subject to a 100% tariff, while Indian motorcycles face only a 2.4% tariff in the US.

Impact on the Agricultural Sector

If the US decides to impose reciprocal tariffs on a wider array of agricultural goods, India’s food and farm exports—where trade volumes remain relatively low but tariff differences are significant—could see substantial disruptions.

Effect on Textiles, Leather, and Wood Products

According to a Reuters report, textiles, leather, and wood products are at a lower risk due to smaller tariff disparities and the limited extent of US-India trade in these sectors. Many American firms manufacture these products in South Asia, leveraging India's free trade agreements to gain access to the US market at reduced tariff rates.

Assessing the Worst-Case Scenario

If the US were to introduce a blanket 10% tariff increase on all imports from India, the Indian economy could see a decline of 50 to 60 basis points. Economists at Standard Chartered Bank estimate this would correspond to an 11-12% drop in US-bound Indian exports.

India’s Efforts to Ease Trade Tensions

To mitigate trade tensions, India has already reduced tariffs on several items. For instance, tariffs on high-end motorcycles have been lowered from 50% to 30%, while those on bourbon whiskey have been cut from 150% to 100%. Additionally, India has pledged to reassess other tariffs, expand energy imports, and increase defense purchases from the US.