“Risk means more things can happen than will happen.” – Howard Marks
Imagine you have planned the perfect family holiday. The weather forecast promises clear skies, hotels are booked, and bags are packed. Everyone’s buzzing with excitement. But on the first day, dark clouds roll in, and a relentless downpour soaks your plans. The itinerary—carefully crafted for adventure and joy—is washed away, leaving disappointment in its wake. Yet, as the rain falls, it’s quietly working wonders beyond your view. The same storm that derailed your holiday is filling reservoirs, nourishing parched lands, and securing a bountiful harvest for the season. What felt like a setback was, in truth, laying the foundation for something far greater—a reminder that life’s disruptions often carry unexpected gifts.
Markets, like a rained-out holiday, love to throw curveballs. We build investment plans, weigh risks, and assign odds, yet the least expected events often steal the show. Three months ago, who’d have bet on the U.S. hitting India with steep 50% tariffs or a major GST overhaul slashing rates across the board? These “tail events” blindsided us, forcing a rethink. Investing isn’t about nailing every prediction—it’s about staying sharp and adapting when the improbable happens.
We explore the unexpected U.S. tariffs and GST cuts, and how to interpret them. While the U.S. tariffs will selectively impact specific sectors, the GST overhaul will deliver broad-based benefits across the economy, likely providing Indian consumers with an annualized gain of INR 1.8 tn.
US tariff headlines vs actual impact
The U.S. has doubled import duties on most Indian goods to a punitive 50% rate (an additional 25% on top of the initial 25% imposed earlier). Crucially, India’s two largest export-earning sectors—IT services and pharmaceuticals—remain essentially untouched. Services constitute a massive share of India’s exports to the U.S. (~USD 158 bn), and none of that is affected.
Overall, about 29% of India’s USD 87 bn in annual FY25 exports to the U.S. falls outside the 50% tariff scope. While pharmaceuticals, petroleum products, smartphones, and semiconductor-related items are exempt, the impact is tangible for niche exporters such as textiles, gems and jewellery, and leather goods. Moreover, many companies we’ve spoken with indicate that their products qualify for exemptions under Annexure II (issued by U.S. Customs and Border Protection), such as when raw materials are sourced from the U.S. or products are supplied for patented U.S. items, among other criteria. Thus, while certain sectors and companies will face real challenges, a one-size-fits-all assessment misses the nuance.
Strategically, India and the U.S. are strengthening ties—despite this tariff episode—through deeper collaboration in technology, defense, and energy. We view the escalation as a short-term negotiating ploy rather than a lasting divide. Should these tariffs be revisited, India could emerge with an even more robust trade partnership, similar to how previous frictions have ultimately fostered greater cooperation. While the U.S. tariff effects are likely temporary, the benefits of the GST rate overhaul promise to be enduring.
GST tax reforms – A booster shot for consumption post income tax cuts:
In a well-timed move, India rolled out sweeping GST (Goods and Services Tax) cuts to stimulate domestic demand. This overhaul reduced the GST rate structure from four slabs to just two: a lower 5% and a standard 18% (eliminating the earlier 28% and 12% rates). This is a big deal for consumers and businesses as goods get cheaper. In combination with recent income-tax cuts (from the February budget), the total stimulus to households is estimated at 0.7% – 0.8% of GDP. Simply put, this broad tax cut benefits a far wider segment of the economy than the U.S. tariff touches. We believe that the above will provide much needed boost to domestic consumption.
Benefits of fiscal and monetary stimulus far outweigh tariff impact
Fiscal and monetary stimulus to fuel growth engine: Since last budget Indian government has announced series of fiscal and monitory measures like:
Reduction in repo rate by 100bps and CRR cut of 100 bps leading injection in the banking system of INR 2.5tn.
Direct tax reduction – giving INR 1tn surplus in the hand of taxpayer consumers
GST Rejig – Giving additional INR 1.8tn benefit for households from GST rationalization.
We believe a combination of all the factors mentioned above will kick start the domestic consumption engine, particularly discretionary consumption and will have a far-reaching positive impact on a domestic demand driven economy like India.
The tariff shock, while significant for select industries, does not derail India’s broader growth trajectory. With stimulus measures like the GST cuts kicking in and domestic demand robust, India will continue to lead world in GDP growth. Periods of market volatility on trade headlines can be opportunities to add to positions, especially in high-quality companies tied to India’s domestic economy.
Favor domestic consumption and financials: The big winners in this environment are sectors benefiting from policy boosts and internal demand. This includes automobile makers, consumer goods, retail and banks/NBFCs (credit demand is likely to rise with consumption).
Watch policy developments – flexibility is key: Negotiations between the U.S. and India are ongoing (there’s pressure on both sides to find middle ground). Any positive resolution – or even the exemption of additional sectors – could rapidly change market sentiment.
Long-term conviction unchanged Looking beyond the next few quarters, our conviction in India’s structural growth drivers remains intact. This episode is, in many ways, a stress test of India’s resilience – and so far, the economy is resilient. Exports matter, but 1.4 bn people’s rising consumption matters as well. India has a proven ability to turn crises into opportunities (indeed, the urgency from this trade spat helped catalyze long-pending tax reforms). As investors, our long-term thesis – fueled by favorable demographics, urbanization, the digital revolution, infrastructure and manufacturing upgrades – remains as strong as ever.
Moreover, macroeconomic math strongly reinforces this optimism. For context, credible estimates suggest that even a steep 50% U.S. tariff on Indian exports would shave only ~0.1–0.2% off India’s GDP. By contrast, the GST tax cuts (including elimination of the GST compensation cess) are expected to add roughly +0.5 to +0.7% to GDP. In short, the benefit from this domestic stimulus should effectively negate the macroeconomic drag from the tariff shock by a margin. The table below summarizes this contrast:
The 50% tariffs are undeniably painful for certain sectors and companies in India. But as stewards of your investment capital, we must focus on the overall picture — and that picture is one of a diversified, primarily domestic-driven economy for sure which can weather this storm.
How are our portfolio’s positioned?
Our detailed analysis of Carnelian’s portfolio companies underscores this resilience. We examined each holding’s revenue exposure to the U.S., and the findings are reassuring; over 80% of the portfolio companies (by weight) has no direct revenue from the U.S., and only a handful of niche exporters (in specialty chemicals, textiles, industrial components, etc.) derive more than 10% of their sales from the American market. Even collectively, those few export-oriented positions make up just a mid-single-digit percentage of the portfolio. In other words, under a punitive 50% U.S. tariff scenario, the hit to our portfolio’s overall earnings would be minimal. And on the flip side, the domestic GST cuts are expected to support earnings growth across roughly more than 20% of the portfolio directly and more when we consider indirect benefit.
In our upcoming quarterly webinar, we will further discuss the same and answer any questions you might have live.
Despite heightened volatility in the markets, our portfolios rebounded faster from the March-25 lows thereby generating positive alpha.
Notes:
Data as on 31st August 2025. Above returns are pre-tax and post expenses.
* The difference in performance is due to the acquisition of the PMS strategy, which includes its legacy performance.