Trump tariffs test Indian economy’s resilience: The recent US tariff salvo against India has all the trappings of a full-fledged trade war that no one, but President Donald Trump, really wants. Predictably, this unilateral move spurred an alarmist narrative with self-styled experts flagging concerns such as “exports doomed”, “growth capsized”, “Make in India dreams dashed”. Such narratives are trending not only on social media but also in columns, pinion pieces, and even editorials of leading dailies, not to mention the prime-time TV talk shows and debates.
But truth be told, this line of narrative stems partly from a mindset defined by capitulation to anything that is US and in part from half-baked understanding about the dynamics of Indian economy which is growing at world beating speed. To me, such commentaries are mostly noises echoing the hubris for which the world’s so called sole super power is known for long.
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Indian economy can absorb Trump tariffs shock
This is not to say that the Trump tariff has no sting for India’s goods exports to the world’s largest economy. The cumulative 50% tariff will sure be a drag on India’s shipments to the US especially in products lines such as textiles, pharmaceuticals, automobiles, steel, and engineering products. But the idea that this spells an economic catastrophe for India is a country mile away from truth. Even if we take the worst-case scenario of a GDP hit of 0.5% or 50 bps for its face value, it signals no economic apocalypse as the economy is growing north of 7% with macros remain in pink of health.
For the sceptics, here are some details. India’s real GDP print expanded by 7.8% in the first quarter of the current fiscal powered by manufacturing agriculture and services. The HSBC India Services Purchasing Managers’ Index (PMI), compiled by S&P Global, climbed to a 15-year high of 62.9 in August, up from 60.5 in July and 60.4 in June.
This gives me enough reasons to argue that instead of wasting time by debating the potential impact of Trump’s reciprocal and revenge tariff (on account of Russian oil purchases), India’s policy makers should now start working on a US Plus 1 strategy that will insulate the country from the irrational behaviour of some national leaders who often tend to weaponise trade policy, currency and payment gateways to satisfy their economic self-interest. Trump tariff, I would further argue, presents an opportunity of a lifetime for India to revisit and re-orient trade policy in a calibrated manner though it means taking calculated risks in the near-term.
India GDP growth prospects unaffected
Ironically, just as American tariffs hit close home, S&P Global Ratings upgraded India’s sovereign credit to a solid `BBB’, its first ever upgrade in nearly two decades. This is not a minor footnote but an irrefutable statement from Wall Street biggies, by repositing faith in India’s fiscal discipline, growth outlook, and economic resilience.
On the contrary, in May this year, Moody’s Ratings downgraded the United States of America’s credit rating from `Aaa’ to `Aa1’ citing rising government debt pushing the US near to a `fiscal cliff’ (especially in the light of Trump’s plans to cut taxes on wealthy 1% which will add trillions of dollars to the US fiscal deficit which already has touched unsustainable levels) amid political polarisation. This has led to larger sell off in treasuries with few buyers for the once coveted US long-term notes.
There are a number of learnings for India from these episodes of utmost import. For one, India’s domestic economy is firing on most cylinders; GDP growing at a steady pace with the trifecta of manufacturing services and agriculture keeping momentum. For instance, in August, manufacturing PMI hit a 17-year high, digital payments clocked record growth, and consumer tax collections trended high.
Importantly, exports are chugging along, buoyed by increasing trade with regional blocs like BRICS, the EU, SAARC, and new trade arrangements like the India-UK CETA and India-UAE CEPA, Similar trade deals are in the works with Japan, Singapore and a number of other nations in the Middle East and South America. Besides, positive vibes are emerging after the SCO summit with Russia, China and scores of other participant nations committing to open their markets for Indian goods and services at mutually beneficial terms.
US plus 1 is the way to go
Considering the fact that the combined share of regional trading blocs with which India has normal trade relations works out to be around 67.2% of the global GDP in PPP terms as against 12.7% share of America, India has enough headroom to navigate the Trump tariff minefield. Therefore, the immediate task at hand for the policy makers is to flip trade policy from a vague China + 1 strategy to a more realistic US plus 1 strategy.
True, such a pivot will take a while to fructify depending on its architecture and scale. But once that happens it will go a long way in helping India ditch its overwhelming dependency on the US markets for its merchandise exports. It will also help Indian exports to diversify geographies and gain competitiveness in not so distant a future.
It is this diversification of trade relations coming on top of stronger domestic demand that act as buffers for India from shocks inflicted by growing protectionist policies in the US. The narrative that American tariffs are inflicting crippling damage overlooks the recalibration of India’s trade policy and international market dynamics.
This is not to dismiss the risks. Global trade tensions remain real, and headline volatility will persist. But such pains are, in my view transient and will pass once India latches on to the new play book and stick to the two cardinal principals; go ballistic to diversify export destinations and root for next generation reforms like GST simplification to boost domestic consumption. This will land Indian economy on a firm footing in the global market place with the economy walking on its two legs – vibrant domestic demand and ever-expanding external demand.
In short, going forward, India’s economic narrative will be less about Trump’s selfish economic policies and tariff tantrums but more about a nation coming into its own, weathering storms and proving that resilience and adaptability are as crucial as raw numbers. To say that the S&P upgrade is no mere a technical detail but it is a testament to changing dynamics of the evolving India Growth Story which is incidentally adding more legs to run a race to become world’s third largest economy.