Lower exports and pressure on pricing to contract industry operating margins by 200 to 300 basis points (bps) in fiscal year 2026, says Icra
After the United States (US) raised tariff rates, India’s apparel export industry faces a sharp downturn in the current financial year (FY26), prompting ratings agency Icra to revise its outlook for the sector to negative from stable.
According to Icra, revenues of apparel exporters are forecast to shrink by 6–9 per cent in FY2026 despite fresh efforts to diversify supply chains and the implementation of the Free Trade Agreement (FTA) with the United Kingdom. The ratings firm warned that operating profit margins, which stood at 10 per cent in FY2025, could fall to about 7.5 per cent as volumes contract in the second half of FY2026, eroding operating efficiencies.
Srikumar K, Senior Vice President and Co-group Head – Corporate Ratings at Icra, described the tariffs as a “material setback” for India’s apparel exporters, many of whom are heavily dependent on the US market. “New order inflows are likely to be hit and margin pressures are imminent, even if some part of the tariff increase burden is passed on to the US importers,” he said.
The US, which accounts for nearly one-third of India’s apparel exports, raised duties by 50 per cent from August 27, 2025. While Indian suppliers advanced shipments to beat the effective date, cushioning revenues in the first half of FY2026, demand in the second half is expected to weaken.
India’s share in US apparel imports is relatively low at about 6 per cent, leaving exporters vulnerable to being replaced by competitors from Bangladesh and Vietnam, which benefit from lower tariffs and have been gaining ground in recent years. Exporters may be forced to offer additional discounts to retain market share, worsening profitability.
The impact, however, will vary across product categories. For certain specialised products and price points, immediate substitution by low-tariff competitors may not be possible due to differences in manufacturing capabilities or lead times needed to add capacity. Moreover, rival producers may hesitate to expand capacity solely on tariff advantages, which could prove temporary.
Icra said that apparel exports in constant currency terms have been largely flat over the past five years, reflecting subdued demand in key markets such as the UK and the United Arab Emirates, and the shift of sourcing to rival Asian exporters. Still, exports to the US grew 4.8 per cent during this period, driven by volume gains in the American market – a trend now under threat from the new tariffs.
The agency forecast that weaker operating performance in FY2026 would be compounded by higher working capital requirements, leading to a deterioration in credit metrics. Coverage ratios are expected to moderate, with interest cover falling to 3.0–3.2 times and total debt-to-OPBDITA rising to 3.2–3.4 times in FY2026 and FY2027, compared with 4.6 times and 2.3 times, respectively, in FY2025.
Indian cotton yarn prices, which remained flat in FY2025, may soften moderately following the government’s decision to exempt cotton imports from duty until December 2025. This provides some relief to manufacturers, though it is unlikely to offset the broader decline in exports and margins.
Icra noted that the adverse impact could be less severe for exporters with manufacturing bases outside India, in countries with lower tariffs, who have the flexibility to shift production. An early bilateral trade agreement with the US or a rollback of tariffs could also reduce the disruption.
Looking ahead, industry participants are expected to focus on preserving existing business shares in the US while leveraging the UK FTA and exploring alternative markets to stabilise revenues in FY2027. Still, the immediate outlook remains weak, with revenue contraction and margin compression likely to pressure the balance sheets of India’s apparel exporters.
