There were news reports a few weeks ago that Indian policy makers had started the exercise of building various scenarios to counter Donald Trump’s threat of imposing substantial tariffs against the rest of the world. Tariffs aside, Trump’s promise of 15% corporate tax and substantial economic deregulation is making the US a very attractive investment destination and is threatening to pull global capital out of emerging markets. The effects are already visible as EM stock markets and currencies are in decline.
To counter the Trump effect China recently announced a $400 billion-plus fiscal stimulus plan as a guardrail against US’s disruptive policies.
India has not made any pre-emptive announcement like China but hopes that Trump’s policies will be less harsh on the Indian economy. Hope is not a sustainable strategy considering what might be unleashed by the new “America first” administration. The world economy is so interconnected and interdependent that even if the US targets China severely it will end up affecting many other large economies.
For instance China has decided to depreciate its currency by 7-8% to counter higher US tariffs. After taking over as President, Trump has said he would initially put a 10% higher import tariff on China. China can possibly neutralise this by depreciating its currency so that the value of its exports to the US does not change much in dollar terms.
Modi’s approach of linking a muscular currency policy to nationalism won’t help
India is also letting its currency depreciate of late in anticipation of the Trump tariffs. Modi’s earlier approach of linking a muscular currency policy to nationalism will have to be abandoned now for reasons of economic survival. It was never a sensible policy to begin with, for that matter.
India has many other issues to worry about as Donald Trump has publicly called India one of the worst tariff offenders. Average Indian import tariffs have only gone up significantly during Modi’s tenure so far in the name of promoting domestic manufacturing and employment. It is another matter that manufacturing as a ratio of GDP remained stagnant for a whole decade and youth unemployment has also grown apace.
The forthcoming budget will possibly reflect the overall response of policy makers to a host of issues , both domestic and global, including the big uncertainty brought by Trump.
India’s problem is that the global uncertainty comes at a time when the economy itself has gone into a funk due to the unexpected decline in the GDP growth estimate at 5.4% in the latest quarter. This has spooked the policy makers as well as the stock markets because both the finance ministry and RBI had become sanguine about a 7% plus growth and proclaimed that India was finally on a steady and sustainable recovery path.
It is immensely worrisome that during Modi’s tenure so far, growth, private investment and employment have not picked up in a steady and sustainable manner at all. It seems like a series of dead cat bounce episodes over ten years. On several occasions what seemed like a recovery has been followed by a sudden sputtering of growth.
Indian economy is in a structural slowdown phase
A latest study by Swiss investment bank UBS, released last fortnight, says the Indian economy is in a structural slowdown phase.
The bank’s research group said “India’s $4 trillion economy has entered a structural slowdown that can’t be explained by cyclical factors like oil-price hikes or declining government spending…”
The deceleration is underpinned by a long-term moderation in credit growth, foreign direct investment, export competitiveness and earnings potential, UBS research has said.
In this backdrop UBS is also skeptical about India’s claim that it is risk free from Trump’s “America First” policies. If anything, the initial public pronouncements by Trump seem to suggest he might be less harsh on China relative to his earlier sabre-rattling against the second largest economy.
In his first media interaction after taking charge as President he spoke in conciliatory terms about China and expressed his desire to have a 50% partnership with the Tik Tok platform in the US. Tik Tok has been a bone of contention in the US as well as in India where it was banned after China’s border transgression in Ladakh in 2020.
India seems to have no strategy in sight
Now Trump is proposing a partnership with the Chinese company while India seems to have no strategy in sight!
Trump has also spoken of an initial additional tariff of 10% on China whereas he had threatened 60% import duty in his manifesto. China must be pleasantly surprised. In sharp contrast, the US president spoke of imposing a 25% import tariff on his long standing trading partners Canada and Mexico from February 1.
Also Read: Trumponomics Will Be Modi’s Trial by Fire
Indeed, if Trump’s bite is far less severe than his bark against China then India needs to reshape its own strategy and start thinking of doing serious business with both America and China. At present India is just hoping that Trump will not hurt the Indian economy much and it is yet to formulate a comprehensive strategy for a deeper economic relations with China after the much publicised thaw along the Ladakh border.
The economic ministries are in favour of a comprehensive policy to deepen trade and investment relations with China. It is no secret that Indian manufacturing is heavily dependent on imports from China in critical areas like pharma, electronics, solar parts and electric vehicles. A liberal foreign investment policy vis a vis China in these sectors makes eminent sense. The forthcoming budget statement and policy refinement thereafter will have to take into account these ground realities in our relations with the largest and second largest economies in the world.
Some of the structural and long standing weaknesses in India’s economy will have to be boldly addressed sooner than later. For starters Modi and his spin doctors must stop talking about Viksit Bharat of 2047 and instead focus on the immediate need to steer the economy away from the gathering storm.
