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Trade War Impact On India Economy


There was a time when monsoons in India were amongst the toughest to predict. Not anymore. The Indo-US ties stand in its shoes now. I am not sure whether anybody in his sane wisdom would be able to hazard a guess whether all’s well; I certainly can’t. Today you see India as a ‘strong strategic partner’ of the US and tomorrow you see the 2+2 dialogues getting repeatedly postponed. Today you see ‘India focus’ in Indo-Pacific Resuscitation of the ‘Quad’ and tomorrow you see the US increase tariffs on Indian steel and aluminium items and India in a tit-for-tat putting a $240 million bounty on its exports of 29 items to the US.

In his first meeting Prime Minister Narendra Modi had with US President Donald Trump, I remember Trump did not miss out on his emphasis on the 30 billion dollar trade deficits with India and in a lighter note the reference to our import tariffs on the Harley Davidsons. In a quickie, the Union Finance Ministry knifed the tariffs of these luxury bikes from 75 per cent to 50 per cent – nobody really seemed impressed however!

The varied impacts of the US sanctions on Iran for the stated violations of the 5+1 Nuclear Deal, the trade deficits with China and India, job losses for Americans in the US and Russia’s purported actions in Crimea, Syria and Ukraine and its stated interference in the west, including its cyber activities are by bits and pieces trickling out as possible rationale behind the US overdrive on its recent protectionism. But it’s (atleast to me) no surprise, it was all along there in Trump’s election speeches!

US ‘sanctions’

So first came the ‘Iran Gate’ – and Iran happens to be our third largest oil supplier at 11 per cent (20MMT) of our total oil purchases. India was rather humiliatingly advised to cut oil imports from Iran to ‘zero’ by November 4 or face sanctions, with a strong no-no for waivers. Then came the conflicts first with China with whom the US has a trade deficit of $375 billion and in a trice a hefty $34 billion tariff bundle was imposed on each other by the two powers. Then as a spin off came the tariff barriers with India as I mentioned already. Things did not stop there – the S400 Air Defence Systems deal with Russia appeared jinxed as the US ‘advised’ its ‘friends’ to have nothing to do with Russia any more – where Russia historically had been our biggest arms suppliers (52 per cent of our armaments are Russian). This was under the ‘Countering America’s Adversaries Through Sanctions Act’ (CAATSA) which the US wants us to sign.

This complex chessboard currently with all the ‘pawns’ still intact with an unpredictable ‘king’ at Washington on one side making his moves and then calculating impacts and the other at Beijing…. ever ready with his strategies and pulling them out one by one, is getting more and more interesting as viewed from here. If this game does close with a ‘checkmate’, the secondary effects on emerging markets such as India could be significant. Our assured slot of the ‘fifth largest world economy,’ could most certainly be presented with a set of opportunities and threats. Unfortunately, it has never been our cup of tea to exploit quick opportunities, which means the trade war may impact the Indian economy more adversely than it should. It’s all a question of preparedness – preparedness for going for the kill.

Benefits to India

I thought it best to examine what comes to India in terms of International Trade – what happens on the side with its macros. I don’t expect a de-escalation of this trade war immediately. None of the sides is known for cowering. Trump is known to have commented to CNN that if ‘they’ (China) won’t relent, another 300 billion dollar bundle is on the way. Be that as it may, let’s now look at the possibilities:

India, which runs a $60 billion trade deficit with China, may stand to benefit as Xi moves to slap levies on US goods such as soybean and simultaneously removes levies from Indian exports. (Beijing has recently slashed tariffs on soybean imported from India, South Korea, Bangladesh, Laos and Sri Lanka from the current three per cent to zero). If Chinese exports to the US slow down as a result of the trade war, India may be able to gain significant traction in textile, garments and gems and jewellery. I read a report from Wood Mackenzie, while China could secure crude oil from alternative sources such as West Africa which has similar quality as US crude, the US would find it hard to find an alternative market as big as China. However, if crude oil prices fall as a result, then other things constant, India benefits immensely.

On the flip side

On the flip side is the impact on the rupee, which is already battling historic lows against the US Dollar making oil and other imports extremely expensive. This would certainly result in inflation, widening of the current account deficit, which is already at 2.4 per cent against 0.7 per cent FY 2017 and an overall macroeconomic instability and possible slippages on sovereign ratings. The US Fed is already on its quantitative easing policy of gradual hiking of interest rates which will encourage flight of capital from debt and equity markets in emerging economies. The trade war will only add fuel to fire.

In all of this, I think India should remain strong and consistent. I think of late we have been seeing ourselves moving in between the three of them – the US, China and Russia – a tad too fast with some sort of seeming desperation. I don’t think this is called for. I wouldn’t for example want a Tom Wingo crying out from Pat Conroy’s ‘The Prince of Tides.’ “Finally, I was robbed of certain optimism, that reckless acceptance of the world and all it could hand my way that had been my strength and deliverance.”


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