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US tariffs threaten to slow Indian garment sector's growth, hit profitability

Mumbai: Revenue growth of the domestic readymade garment (RMG) industry is projected to slow to 3-5% this fiscal year, after the US imposed a steep 50% duty on India's imports to the world's largest economy. The tariffs, which take effect from Wednesday, could crimp profitability of garment makers, likely straining their financial health, according to a note from ratings agency Crisil released on Tuesday. The impact will vary, hitting some firms harder than the others, especially those that generate over 40% of their revenue from the US. Crisil expects the share of the US in India's RMG exports to fall from 33% in FY25 to 20-25% this fiscal year. Garment makers Arvind Ltd, Pearl Global and Gokaldas Exports are among the major exporters to the US. However, the domestic market, which accounts for about three-quarters of the sector's revenue, is projected to grow by 8-10% this fiscal year. India's readymade garment makers' revenue in FY25 rose 8% to ₹5 trillion, split into ₹1.4 trillion worth of exports and ₹3.6 trillion in domestic sales. Hit by the US tariffs, exports are likely to decline to ₹1.2 trillion in FY26. However, domestic sales could rise to ₹4 trillion. The 21-day deadline to impose a 25% additional punitive tariff (for buying Russian oil) on Indian exports to the US ends on 27 August. In a draft notice published on Monday, the US administration laid out its plan to impose a 50% tariff on Indian products ahead of the deadline. Crisil analyzed over 120 manufacturers of readymade garments with a total revenue of ₹45,000 crore. RMG exports totaled $16 billion last fiscal year and accounted for 27% of the RMG sector's revenue. A third of these exports went to the US. "If the tariffs hold, RMG exports to the US will see a sharp decline. In the first quarter of this fiscal, total exports from India rose 10% on-year to $4 billion, with exports to US recording a 14% growth during the same period. The trend is expected to sustain through 26th August till the enhanced tariffs kick in. Post 50% tariffs, Indian exports to the US may be minimal, despite limited capacity of competing nations in value-added garments and lead time taken by big-box retailers in the US to re-align their sourcing arrangements," said Manish Gupta, deputy chief rating officer, Crisil Ratings. The 50% tariff puts India at a distinct disadvantage compared with neighboring countries like China, Bangladesh and Vietnam that have a strong domestic manufacturing base. This would mean Indian companies will have to realign trade with other major export destinations -- the European Union (EU), the United Kingdom (UK) and United Arab Emirates (UAE), which together accounted for 45% of the country's exports in FY25. In its earnings call earlier this month, Sivaramakrishnan Ganapathi, vice chairman and managing director of Gokaldas Exports, said that the revised reciprocal tariffs imposed by the US on India are expected to pose a challenge in the second half of this financial year. "Brands are cautious and want to know the tariff impact on various geographies for committing their orders. India has a large export business of $16 billion per annum. It's impossible for any brand to find alternative solutions for this volume elsewhere in the short run. A clarity on the tariff imposed on India over the next few months will allow this churn to settle. In the meanwhile, a higher tariff from August across all regions would impact business volumes in the short run. As you are aware, most of the countries which export apparel, barring China and India, are tariffed at about 20%. So that would have a potential inflationary impact in the market and could impact business volumes going forward," he said. Rahul Mehta, chief mentor at the Clothing Manufacturers Association of India (CMAI), said that exporters are facing uncertainty and confusion, with orders declining significantly. However, the industry is hopeful that both countries will reach a deal that benefits businesses. "India's total exports to the US were about $5.5 billion in 2024-2025 -- of this approximately $2-2.5 billion would have been shipped and the balance $3-3.5 billion is pending. We don't think 100% of orders will get cancelled. However, some exporters could face bankruptcy; while others could face serious financial stress. Jobs could also be at risk," he said. Stopping shipments overnight isn't feasible, Mehta added. "It's difficult to boycott those kind of volumes overnight," said Mehta. India is the sixth-largest exporter of textiles and apparel globally, with the sector's exports valued at $34.4 billion in FY24, government data shows. Europe and the US consumed nearly 66% of India's apparel exports, 58% of finished non-apparel goods, and 12% of raw materials-semi-finished materials. Mehta said tariffs would hit the smaller players harder. About 80% of the industry is made up of mid- and small-sized businesses. "Large players with manufacturing facilities outside India are well-placed. They are able to transfer orders to Vietnam or Bangladesh if they have those manufacturing facilities," he added. Meanwhile, Crisil Ratings' director Gautam Shahi added that the domestic market for RMG, accounting for three-fourths of the sector's revenue, will continue to see steady revenue growth of 8-10% this fiscal, helped by better demand at home. "This, in turn, will cushion the tariff blow and spur overall growth at the sector level, but at a slower pace than last fiscal," he said. Weaker revenue growth and tariff-driven competitive disadvantage in US will impact profitability of India manufacturers. "Profitability of RMG exporters dependent on the US could contract 300-500 basis points as they will bear the tariff brunt," he said. In case the tariffs are returned to the previously announced level of 25%, India could maintain its competitive advantage, given its stronger presence in the value-added garments segment compared with its rivals. That would then limit the impact on Indian exports to the US, as per Crisil.

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