US Tariff Relief Revives Apparel Exports, Diamond Sector Remains Weak: ICRA

India’s export-oriented sectors have received a temporary boost following the easing of US trade barriers, with tariff relief helping stabilise the apparel industry, even as challenges persist for the cut and polished diamonds segment, according to ICRA.

In its latest assessment, ICRA said the outlook for India’s apparel exports has been restored to “stable”, while the outlook for the cut and polished diamonds sector continues to remain negative. The agency attributed this divergence to varying demand trends, structural changes, and competitive pressures in global markets.

ICRA noted that the downward reset in US tariffs to 18 per cent from the elevated levels imposed in 2025 represents a “relatively smooth landing for Indian exporters at a time when global trade dynamics remain fluid.” The move follows a US–India joint statement that reduced reciprocal tariffs from 25 per cent to 18 per cent.

In addition, the US government has withdrawn the additional ad valorem duty of 25 per cent that had been imposed in August 2025 on Indian imports linked to Russian oil purchases. This duty was removed through a US Presidential Executive Order, further easing cost pressures on exporters.

Reflecting on the impact of earlier trade restrictions, Jitin Makkar, Senior Vice President and Group Head – Corporate Ratings, ICRA Limited, said in the release: “The sharp increase in US tariffs last year had been particularly debilitating for export-oriented companies in sectors such as textiles, cut and polished diamonds, and leather and leather products. Apparel exporters, for instance, saw their margins compress by nearly 200 basis points over the past couple of quarters as they were compelled to extend discounts to US buyers to retain volume share.”

According to ICRA, these margin pressures had weakened profitability across several labour-intensive industries, forcing companies to prioritise volume retention over earnings stability. Many exporters were compelled to absorb higher costs to protect long-standing relationships with overseas buyers.

Has the revenue outlook improved for apparel sector?

ICRA’s latest report indicates that the apparel sector’s return to a stable outlook is anchored in expectations of gradual financial recovery. While sector revenues are still projected to contract by 3 to 5 per cent in FY2026, the agency now expects a rebound of 8 to 11 per cent in FY2027.

This marks a notable improvement over ICRA’s September 2025 forecast, which had projected steeper declines of 6–9 per cent for FY2026 if elevated tariffs had remained in place.

The agency said the improved outlook reflects easing cost pressures, better pricing power, and stabilising demand conditions in key export markets, particularly the United States.

Is the diamond sector faces structural challenges?

Despite tariff relief, the outlook for the cut and polished diamonds industry remains negative, reflecting deeper structural challenges, ICRA said.

The rating agency highlighted the growing popularity of lab-grown diamonds, which have gained widespread consumer acceptance and disrupted traditional pricing mechanisms for natural stones. This shift has exerted sustained pressure on the profitability of exporters dealing in mined diamonds.

While natural diamond exports are expected to grow by 6–8 per cent in FY2027, supported by tariff reductions and the introduction of “BIS labelling” to distinguish them from lab-grown alternatives, overall export values remain significantly below historical peaks.

ICRA pointed out that total diamond exports are still far from the USD 24 billion high recorded in FY2022, underscoring the slow pace of recovery in the sector.

Assessing the broader trade outlook, Jitin Makkar said: “Against this backdrop, the lowering of US tariffs, as a prelude to the formal signing of the US-India trade agreement in due course, as also the anticipated implementation of the India-EU free trade agreement next year, besides other bilateral trade pacts, augur well for a gradual strengthening of India’s manufacturing export growth over the medium term.”

ICRA noted that these evolving trade arrangements could help Indian exporters diversify markets, improve competitiveness, and reduce vulnerability to unilateral policy shifts.

While welcoming the immediate relief, ICRA cautioned that Indian companies are unlikely to rely solely on tariff concessions for long-term stability.

The agency observed that exporters are increasingly pursuing geographical diversification as a risk management strategy, expanding their presence in Europe, West Asia, Africa, and emerging Asian markets. This approach aims to hedge against an “increasingly volatile and geopolitically-influenced trade environment.”

According to ICRA, such diversification, along with investments in technology, compliance, and value-added products, will be critical in sustaining export growth over the coming decade.

(With inputs from ANI)