The promise of Trumponomics for India
Radical measures by Trump can benefit India in several different ways. India is open to offering easier market access for U.S. firms if Washington reciprocates under President-elect Donald Trump, who has long called out New Delhi for its high tariffs, sources have told Reuters. Closer to the end of Trump’s time in the White House during his first term, India and the US agreed to negotiate a limited accord, in an effort to bridge their differences.
India had almost concluded a mini trade deal during Trump’s first term but for the COVID-19 pandemic, a retired diplomat told Reuters. “So, there is a scope to conclude a free trade agreement under Trump II.” New Delhi is not too worried about the fate of its trade ties with Washington in Trump’s coming term, the sources said, with China largely front and centre for his tariff threats.
Trump’s hard stance on China will only favour India as the US investment will head for India instead of China which will boost markets as well as manufacturing. Supply chains have already been moving away from China and towards India, and Trump’s re-election will only push this trend further.
Market watchers see the possibility of funds flowing into India and Japan while investors assess Trump’s anti-China stance, with the president-elect earlier having threatened to put tariffs of as much as 60% on Chinese goods, Bloomberg reported. Morgan Stanley just reiterated its preference for the two nations’ shares over China’s. India, viewed as a manufacturing alternative to China, is appealing to investors for its relative immunity to global risks given a domestic-driven economy.
“Supply chains have been moving away from China and that helps not only Japan and India but also other countries, particularly in Southeast Asia,” said veteran emerging-market investor Mark Mobius. “India is the big beneficiary since only India’s workforce can match the Chinese in numbers and labor costs. With Trump maintaining or even extending trade restrictions on China, this will be positive for India.”
“He will come down heavily on China. If Trump increases tariffs for countries like India by a lower magnitude than China, then it stands to gain,” Jayant Dasgupta, India’s former ambassador to WTO, has remarked. Mobius has told ET Now that Chinese companies are moving to India to produce because this is one way to get around the US tariffs.
Trump’s second term offers a mixed but generally positive outlook for India’s economy, according to a report by Elara Capital. While some indirect tariff impacts on Indian goods may arise, sectors like IT, pharmaceuticals, electronics manufacturing services (EMS), and defence are expected to benefit from Trump’s anticipated economic and foreign policies. Elara Capital remains optimistic about Indian equities, particularly in sectors like IT, pharma, EMS, and defence, given their resilience and exposure to the US market.
With Trump’s focus on fracking and boosting US oil output, India’s oil-import-dependent economy may gain as lower global oil prices benefit oil marketing companies (OMCs) and other sectors reliant on crude oil derivatives. Elara also underscores the promising future of India’s EMS and data centre industries, which align with Trump’s supply chain diversification efforts.
Despite concerns over potential changes to US immigration laws, India’s information technology (IT) sector is upbeat about Trump’s return to the Oval Office. After the US election results, IT stocks have appreciated sharply.
IT companies expect easier finance policies around interest rates, inflation etc., which may help loosen IT budgets of US companies. A stronger dollar benefits the Indian outsourcing industry, as a majority of the IT services companies cater to the US as a key business market. Trump’s proposed tax cuts are likely to expand discretionary tech spending by US companies and thus benefit Indian startups registered in the US as well as technology companies. Trump’s tough stance on China can divert American technology investment into Indian companies.
The perils of Trumponomics for India
The world is cautious of Trumponomics for its potential to create disruptions in global trade. Trump had described India a “tariff king” during his first term and called it a “very big (trade) abuser” during his poll campaign.
In his first term, Trump went on to increase import duty on steel and aluminum by 10-25%, invoking national security provisions. The duty impacted 2.3% of India’s trade with the US, and the government responded with retaliatory tariffs on almonds, apples, lentils and steel after preferences were also withdrawn by the Trump administration. This time too, he has indicated his preference for “tit-for-tat” tariffs. “So, we’re going to do a reciprocal trade. If anybody charges us 10 cents, if they charge us $2, if they charge us 100%, we charge the same,” Trump had said ahead of Modi’s US trip.
Trump doesn’t believe in looking at the average tariff or if the levies are within permissible limits. His attacks are political. “Trump may pressure India to cut tariffs and also impose higher tariffs on Indian goods, especially in sectors like automobiles, textiles, pharmaceuticals, and wines, which could make Indian exports less competitive in the US market,” said Ajay Srivastava of Global Trade Research Initiative (GTRI).
The Indian rupee may face depreciation pressures due to the strengthening of the U.S. dollar and firming yields. Under a second Trump administration, the Federal Reserve may adopt a longer-term hawkish stance, potentially raising interest rates beyond market expectations unless inflation and growth rates decline significantly, Elara Capital has said. Over the next three months, US 10-year yields could hit 5 per cent, a move that might limit the positive effects of any potential Fed rate cuts. This shift could challenge emerging market currencies, including the Indian rupee, with the USD/INR exchange rate potentially reaching 84.5 due to a firm dollar and rising US bond yields.
Additionally, weakening corporate earnings in India and sustained FIIs outflows could strain the Indian rupee in the near term.
Trump’s previous term saw an increase in salaries for H1B workers as well as visa fees. In this term, the Trump administration may reconsider the annual allotment of H1B work visas, currently capped at 85,000. H1B applications could face tougher scrutiny, as denial rates under the previous Trump administration reached an all-time high of 24%.
Indian IT firms are the largest users of H1-B visas and non-immigrant visas that allow US firms to temporarily employ foreign workers. Brokerage firm Nomura’s recent report said that India could be adversely affected by tighter immigration policies. Indians received the highest number of work visas (H-1B visas) from the US, accounting for over 72% of the visas issued in the 2023 financial year.
(With inputs from agencies and TOI)