Donald Trump administration’s protectionist stance and its ‘America First’ policy could potentially trigger tariff wars between the USA and other economies, say some. However, the China+1 strategy augurs well for emerging economies like India, argue others. It is still a mystery as to which side the camel would sit.
Donald Trump’s re-election as the President of the United State of America is being celebrated not just by his supporters in the US but in India too though there is also a consideration that it would be another four-year tenure of massive disruption given his hardline stance of protectionism and ‘America First’.
While one school of thought fears setbacks on economic front, especially those related to tariffs, there is an overwhelming optimism in the other lot, which sees India gaining from his re-election as a fallout of his China policy.
It still remains a mystery as to which side the camel would sit.
The president-elect’s utterances on India in the past and even during his election campaigns this time have not been conspicuously inspiring. He called India a tariff “abuser” and “biggest charger” at time.
While India’s stance on this has been that higher tariffs was not with an intention to curb imports but to protect the interest of domestic industries, the argument holds for the other side as well.
The affected sectors could likely include automobiles, textiles, pharmaceuticals, information technology services and wines.
The USA’ goods and services trade with India is skewed in favour of India with trade deficit of nearly USD 50 billion. The total trade stood at USD 192 billion in 2022 according to the government data.
Even in his last tenure, Trump had said that he would work towards creating a trade balance with its trade partners.
Trump’s posturing on Chinese goods is well known. Goods that are manufactured in the US also use a lot of Chinese components and they may also come under the axe, many fear.
Meanwhile, another school of thought sees India as a likely beneficiary from Trump’s stance on Chinese imports. Trump had threatened to levy duty by as much as 60 per cent on them. While some are calling it impractical and a rhetoric, the action could soon start on this front.
In 2018, the world had witnessed a tariff war between these two world’s largest economies. China, though, found a way by dumping its goods via other countries, it could be hard this time around.
For instance, China-made electronics goods found their way to the US via the Vietnam route. There is a looming danger that his administration could impose higher tariffs on these countries, this time around.
This school of thought sees the China+1 strategy come into play with Trump remaining at the helm with India benefitting from it.
India has been promoting its manufacturing sector in a big way and the government has been taking steps like production linked incentive (PLI) for legacy and emerging sectors to increase domestic production, and going ahead, we could become exporters of a large number of goods.
Impact on Rupee
Trump’s re-election is already showing its impact on the greenback. On November 6, when the US elected its 47th president, dollar index (DXY) rose 6 per cent against the basket of six major currencies, hitting the 2024 high.
Last week, the Indian Rupee (INR) hit its all-time low of 84.40 against the US dollar. There could be a fall by another 8-10 per cent in INR in his second term, according to a report published by the State Bank of India. A stronger dollar could be good for export facing sectors but may potentially drive inflation.
Despite the Federal Reserve’s 25 bps rate cut in November, USD and bond yields have risen, making US a more attractive investment destination for global investors. As a result, foreign institutional investors (FIIs) have been pulling out money from emerging markets and investing in the US.
India has not remained untouched from this phenomenon. Over Rs 1.21 lakh crore of outflows have been witnessed from the Indian capital markets in the last 27 trading sessions. The government bonds which were included in the JP Morgan index this year in June have also seen an exodus of outflows.
In Trump’s previous stint as the president, the foreign direct investment (FDI) stood at USD 11 billion between 2016-20 (as per a media report). This is less than a third of what it received during Joe Biden’s four-year term. Between 2020 and 2024, India received FDI of USD 35.3 billion.
Inflation
One of the fears being voiced is the return of inflation owing to the tariff war. Trump’s tariff impositions could invite a retaliatory move from other economies that may unsettle the demand-supply situation. If that happens, it would be a sorry state of affairs as the war for price stability has been long and tedious and is still ongoing amid wars and economic challenges.
Moreover, China’s slowdown problems could amplify with the China+1 strategy. Notwithstanding massive government stimulus, the dragon nation is facing its worst economic crisis in decades. Its problems are more structural and government aid is not expected to solve its problems. With its goods not finding takers, commodities could take a severe blow.
Indian IT sector
This again remains a contentious issue with the jury still out on whether the domestic IT industry could stand to gain or lose out.
Trump in his election campaigns had promised corporate tax cuts that would leave enough money in the hands of corporates to start spending on discretionary things. That augurs well for the Indian IT industry which has a big stake in the software services business in the US markets.
However, tightening H-1B visa rules could be counterproductive for them, raising cost for Indian IT firms. That could trigger further curtailments towards hiring of Indian professionals in that country.
So, no matter which side of the ideological divide we are, Trump’s second innings is raising more questions than giving answers. The only certainty is that the next four years will have no dearth of action and drama.
For us, political stability, growing middle class, second largest market in terms of size and strength in country’s macros remain biggest assets. India is also likely to become world’s fourth largest economy in some time, leaving Japan behind. So India as an economy is no pushover. Expect some hard bargains from both sides.
