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India’s apparel export industry is poised for a challenging year in FY2026 following a sharp hike in tariff rates by the United States, prompting rating agency Icra to revise its sector outlook from stable to negative.
The US, which accounts for nearly one-third of India’s apparel exports, increased import duties on Indian garments by 50%, effective August 27, 2025. The move is expected to significantly impact export volumes and profitability for Indian exporters, many of whom rely heavily on the US market.
According to Icra, apparel export revenues are likely to contract by 6–9% in FY2026 despite efforts to diversify sourcing markets and the recent implementation of the India–UK Free Trade Agreement (FTA). The agency also forecasts a decline in operating profit margins from 10% in FY2025 to approximately 7.5%, citing lower volumes and declining operational efficiency.
“The tariff revision is a material setback for Indian apparel exporters,” said Srikumar K, Senior Vice President and Co-group Head – Corporate Ratings at Icra. “New order inflows are likely to be hit and margin pressures are imminent, even if some part of the burden is passed on to US importers.”
Exporters had advanced shipments ahead of the tariff deadline, which will likely support revenues in the first half of FY2026. However, demand is expected to weaken in the second half, pressuring volumes and pricing.
India’s relatively low 6% share of US apparel imports makes it vulnerable to displacement by Bangladesh and Vietnam, which continue to benefit from lower tariffs and competitive cost structures. To remain competitive, Indian exporters may be forced to offer deeper discounts, further straining margins.
The impact, however, will not be uniform. For specialised product categories or higher price points, immediate substitution may be limited due to the lead time and capacity investments required by competitors. Moreover, global producers may hesitate to commit capacity expansions based solely on what could be temporary trade dynamics.
Icra highlighted that over the past five years, India’s apparel exports in constant currency terms have remained flat, with subdued demand from key markets such as the UK and UAE. The US market had been a bright spot, growing at a 4.8% CAGR — a trend now at risk.
On the financial side, Icra expects weaker operating performance and higher working capital needs to impact credit metrics. Interest coverage is projected to fall to 3.0–3.2 times, down from 4.6 times in FY2025, while total debt-to-OPBDITA is expected to rise to 3.2–3.4 times, up from 2.3 times.
The government’s recent move to exempt cotton imports from duty until December 2025 may provide limited relief, helping soften domestic yarn prices. However, this is unlikely to offset the broader decline in exports and profitability.
Exporters with manufacturing presence in low-tariff countries may mitigate the impact by shifting production. In the longer term, an India–US trade agreement or reversal of the tariff hike could help restore momentum.
In the interim, the focus will likely remain on preserving US market share, leveraging the UK FTA, and exploring new markets to stabilise revenues in FY2027.
(Source: ANI)
