Rising domestic demand during the ongoing festive season, combined with recent cuts in goods and services tax (GST) rates, is expected to help cushion the impact of higher US tariffs on several Indian sectors, bankers have said. Micro, small and medium enterprises (MSMEs) are increasingly pivoting to local markets and diversifying supply chains, while also exploring opportunities in alternative export destinations or routing goods through third countries to soften the effect of tariffs that doubled to 50% on a wide range of products from 27th August.
Bankers indicated that this shift towards the domestic market, along with supply chain realignments, is set to generate fresh working capital needs and incremental credit demand, particularly in MSME-heavy clusters.
Manish Kothari, group president and head of commercial banking at Kotak Mahindra Bank, noted that a strengthening domestic demand environment and opportunities in other economies may provide relief for many businesses. He said GST reforms were helping MSMEs by lowering input costs, simplifying compliance and reducing working capital pressures, which could unlock fresh credit demand, particularly among first-time and small borrowers.
Export-oriented MSMEs in sectors such as textiles, gems and jewellery, seafood, engineering goods and auto components have been especially affected by the tariff hikes. However, domestic consumption may provide a partial offset.
Anshul Chandak, head of treasury at RBL Bank, said the government had been proactive in supporting affected industries, particularly MSMEs, and that the sector should not face undue credit stress from tariff shocks. He acknowledged that secondary effects from weaker orders and margin pressures could weigh on borrowers, but added that many businesses were likely to manage through stronger domestic demand or by shifting to other markets.
