India Policy Watch: Our Good Friend TrumpInsights on current policy issues in India—RSJLast week, I resisted the temptation to write about Trump’s posts on tariffs on India and its purchase of Russian oil because I wasn’t sure how he would follow his words with actions. A week later, we have some answers. He signed an executive order this week imposing a total tariff of 50 per cent on Indian imports. The 25 per cent levied initially will take effect from Thursday, and the remaining 25 per cent will come into play by the end of August. Trump also ruled out any further trade negotiations till the issues of non-monetary trade barriers and the purchase of Russian oil are resolved (to his satisfaction). A lot has already been written about this week on this topic. I still believe we will get a trade deal done after we have sufficiently massaged Trump’s ego and followed the playbook that others have used in cutting side deals with his businesses in the next couple of months. Some of the ground for doing precisely that is being prepared already, with the optics of the PM meeting “his friend” Putin, and fresh overtures being made to China to demonstrate strategic autonomy to the domestic constituency. Additionally, the rhetoric of defending the interests of the farm sector and being willing to pay a personal price to defend India to me suggests that the government is building a cushion to protect itself in the near future when the trade deal is eventually put to bed, with some of the concessions being asked for by the U.S. The trade deal with the U.S. is necessary for India, and it should not be caught up in an ego battle against a president who has only three effective years of his presidency left. In the long run, reducing non-monetary trade barriers and making Indian exporters more competitive globally without the crutches of tariffs will benefit India. The Russian oil purchase is a pressure tactic only, and a Trump-Putin summit with some kind of resolution on Ukraine will sort that issue out. We should have read the tea leaves better during the trade negotiations and not let things come to this pass. There’s no predicting what Trump does, but I refuse to believe that till Trump put up those posts on Truth Social, the Indian negotiating team had no idea that this was coming. Somewhere, the government was caught up in its own image of being an indispensable ally of Trump and the U.S. and in its own verbosity over the past year, where it was lecturing the world on its double standards and hypocrisy over Russia. Staying below the radar and getting the trade deal over the line would have been a better advert for the Vishwaguru status than strutting around the world telling that this new India responds in kind. Given the uncertain nature of current geopolitics, there was nothing to gain with this approach. And now it has egg on its face with Trump taking particular pleasure in calling out his role as a mediator during Operation Sindoor and taking jibes at its economy. That Trump is still negotiating with China, the biggest buyer of Russian oil and a worse tariff offender, should give India a realistic picture of where it stands regarding geoeconomic heft. Anyway, I hope useful lessons have been learnt and the current rhetoric around this topic is just that, while more practical minds are finding ways to get the trade deal back on track without falling into the trap of counter tariffs on U.S. imports or other attempts at flexing muscles. Focus on building them before flexing them. If that requires nominating Trump for a Nobel Peace Prize, so be it. Maybe India should also nominate him for Economics, too. Shortens the odds of him being a Nobel laureate further and may get it back in his good books. Close the deal and then maybe give him the Bharat Ratna too while he’s sitting on an elephant in front of the Taj Mahal. I have been reading about the potential impact of the 50 per cent tariff on the Indian economy, and I’m disappointed by how much of the analysis is a mere linear extrapolation of the impact on Indian exports. This is how we end up getting that 0.3 or 0.6 per cent being shaved off from the usual 6.5 per cent GDP growth estimates. There’s the usual talk in such analysis about the Indian economy being resilient on the back of domestic consumption and its relatively lower dependence on exports. There’s also this belief that Indian exporters will find a way to circumvent the navigation by using entrepôts like Dubai or outsourced partners in other countries that have lower tariffs, and things will be back to business as usual. These are armchair opinions with no understanding of the interrelation of factors at play in an economy. There is also minimal appreciation of the difficulty in managing logistics for a small-time exporter and overconfidence in how the costs of such arrangements will play out. Anyway, if the impact is only that small (0.3 to 0.6 per cent), we should laugh off all Trump’s threats and get on with our lives. That would be a serious under-estimation of impact. Rather, we should be doing scenario planning to assess the impact. There are multiple moving parts, and they change constantly. Among the many possible scenarios that might play out in the next six months, there’s an entirely plausible scenario of the kind I’m outlining here. India can’t get the U.S. trade deal over the line, and the 50 per cent tariff stays, while most of South and Southeast Asian economies continue to be below 20 per cent. This relative difference plays out quite quickly and begins hurting the order book of Indian exporters within a year. The early signs of stress in SME sector loan books (as mentioned in the last edition) that we are seeing now get exacerbated. The SME segment, the one strong growth engine of the economy in the past 3 years, therefore slows down considerably. Bank credit growth remains muted at below 10 per cent or lower. Simultaneously, the continued weakness in the IT services sector continues with a slower US economy and the impact of AI on coding and testing automation. This leads to lower hiring at the entry level and continued layoffs at the middle management layer of these firms. The net FDI inflow that’s already at its lowest since COVID-19 continues to remain so as more foreign investors book profits on their previous investments and new inflows remain muted because of the tariffs. In addition, Indian refiners that purchase Russian crude oil and sell petrochemical products to the world find the western sanctions more real with Indian banks being warned about access to U.S. capital markets being stopped if there’s continued violation in dealing with sanctioned entities. Any disruption of Russian crude to India and therefore to the world will raise the price of crude for India, and that will play out in terms of retail costs of petrol and diesel, and have an impact on inflation. All of this will put a downward pressure on the Rupee and that will need constant interventions by the central bank to dip into its forex reserves to hold it steady. There’s no reason to believe this is a corner case scenario with a very low probability of all of these things happening together. Given where things stand at the moment in the economy, this is squarely in the realm of possibility. The combined impact of these (and probably many other interrelated factors) could be significantly higher than just shaving off 30-60 bps from the GDP growth as is being forecast now. This brings me to the other point of discussion - how does one deal with Trump? Did we egregiously misread him while drinking our own Kool-Aid with “my friend, Donald” and “ab ki baar, Trump Sarkar”? Psychoanalysing Trump is possibly the favourite pastime of analysts in the past six months. I don’t think anyone has got anywhere new with it. He’s remained the same man since he’s turned an adult. The 2024 film ‘The Apprentice’ is a good account of Trump in his early adult years and the influence of Roy Cohn on him. It is not too difficult to judge the man. He is an unpredictable megalomaniac with almost no principles. Everything else that’s said about him (genius, dealmaker, conservative, small-government proponent, wrecker-in-chief, etc.) is people projecting their own anxieties or hopes on him. The unpredictability part is what makes him different from a lot of megalomaniacs that India has dealt with before. Megalomaniacs are quite easy to satisfy. Give them a few state awards (heh), praise them to the high skies and shower them with gifts, and they see you as a friend (Keir Starmer has played this quite well). But Trump is a unique problem because even with all of these, he can still turn on you. He has used this unpredictability to great effect in his corporate and public life. India is finding this out the hard way. The good news (?) is that his lack of principles allows those dealing with him to blunt his unpredictability. This is why dictators, strong men and royal families of the Middle East have found it the easiest to deal with him. They play on both his ego and his lack of scruples to take out the edge of unpredictability. This includes buying into his cryptocurrency, permitting more Trump towers and golf courses in their countries, gifting him private jets and other bribes that we haven’t heard of so far. Democracies with leaders who have to win another term will always find it difficult to either bow down too low to him or to find ways to stuff the pockets of his family without being called out by the opposition. But that’s where we are with Trump, and we will remain so for the next three years of his tenure. India will have to find a way to do this. Don’t ask me how. The good news is that this, too, shall pass. As Janan Ganesh puts it in the FT (“The high summer of Donald Trump”), we may have reached “peak Trump” already. Things will only go better from here on. As he writes:
India will do well to keep official rhetoric about strategic autonomy and its self-interest to a minimum (let the commentariat make that noise), keep its head down, get the deal done and ride out this storm. Another View—Pranay KotasthaneWe differ on this one. Securing a deal is vital, but there’s no way any Indian government will concede to Trump’s unreasonable demands. A better position is to keep negotiating at the margin and let the Trump-Xi dynamic play out. Here’s why. Foreign policy is not a finite game; a trade deal is a milestone, not a destination. For one, a trade deal with Trump does not guarantee lower tariffs. To him, tariffs are the solution to all the world’s problems. It’s not even about America’s trade imbalance anymore. The fact that he has chosen to apply tariffs on India for buying oil from Russia, of all options at America’s disposal, signals that this tariff threat game will continue for some time. Next, the pace at which Trump is claiming his role in ending wars suggests that he takes this pretty seriously. Just yesterday, he brokered a deal between Armenia and Azerbaijan. Azerbaijan President Aliyev emphatically remarked, "Who, if not President Trump, deserves the Nobel Peace Prize?” Trump is desperate to get such a message of gratitude from India. For India, though, the issue is not trivial. It’s not just a question of nominating Trump for a useless prize but about conceding that Washington is the most crucial player in the India-Pakistan equation. In the past, Indian governments have been willing to thank the American government for its role in ‘facilitating’ peace between India and Pakistan. Governments generally follow the precedent in such matters, and India would likely have been ready with this kind of diplomatese on May 10th as well. The crucial difference is that back then, no American President announced to the whole wide world, before India or Pakistan, that he had gotten them to agree to “a full and immediate ceasefire” after a “long night of talks mediated by the United States.” This perhaps threw the Indian government off guard, which wanted to project that it was pausing the conflict on its terms after gaining the upper hand. And then, the External Affairs Minister dismissed Trump’s claims of mediation on the floor of the Parliament with these words:
There’s no going back on this. India cannot give Trump what he wants most desperately, and that seems to be the bone of contention. We’re two months away from the announcement of the Nobel Peace Prize 2025, so India should be looking to let that moment pass by. I also don’t think India misread Trump. If anything, it was first off the blocks to massage his ego. But the stakes are far higher when it comes to conceding on the India-Pakistan conflict settlement. Next, India needs domestic economic reforms. But once a trade deal has been signed under duress, any attempt at reform will be tainted as a weak play. It is one thing to use IMF pressure as an excuse to undertake economic reforms and entirely another to do something similar after Trump’s transgressions. In fact, the legitimacy for reform ideas will be higher if they are seen to be taken to mitigate the effect of Trump’s bullying. Finally, not bending over backwards in Trumpian Olympics doesn’t mean India has no options. My senior colleague Nitin Pai mentions here that placing a few orders for some American small modular nuclear reactors might be a win-win that might defray tensions. Commitments to buy more American natural gas can also be readily conceded. Besides these inducements, there are defence purchases to play with. A big buyer always has leverage, as China’s attempts to coerce Australia illustrate. Given that India is the world’s largest arms importer, only behind Ukraine, the US has a lot to lose or gain on this front. The postponement of the Indian defence minister’s visit to the US is one low-cost signal already sent. Besides, the government denying that India has paused any defence purchases from the US is itself a high-value signal. As I discussed in the previous edition, the relationship between the US and China is another vital yet uncertain variable. Imagine if India went all in on the trade deal now, only to find that a Mar-a-Lago summit between Xi and Trump has further reduced tariffs for China. Of what use would that deal be? On the other hand, if the China-US dynamic worsens, negotiating with Trump will become far easier. So that’s where we are. India-US relations have seen far worse times. India was able to survive the sanctions after the Pokharan blasts and turn around the relationship within a decade with the signing of the civil nuclear deal; it can also manage Trump’s shenanigans. DON’T PANIC. Apart from this discussion on managing Trump, three points are worth considering. I wonder what a perverse incentive the Nobel Peace Prize has become. Its enshittification began with Barack Obama getting it for merely talking peace. And now it’s reached a stage where another US President is virtually demanding that he be feted as an apostle of peace, even as he continues to support Israel’s actions in Gaza. Second, I am troubled by India’s stance on resisting the opening up of the dairy sector to external competition. This is the second time we are willing to incur significant costs to protect this sector. The first time was when India chose to stay out of the Regional Comprehensive Economic Partnership (RCEP) in 2019, citing the competition posed by the highly efficient dairy industries of Australia and New Zealand. Six years later, the excuse remains the same. So, how long are we willing to back one sector’s interests over others? One could explain away the reluctance on agriculture for various reasons, but permanent protectionism in an industry where India is the world’s largest producer does not augur well. Third, it’s fascinating how the India-Pakistan question has inserted itself into the US-India trade debate. It’s a ghost that keeps coming back. What’s your view? HomeWorkReading and listening recommendations on public policy matters
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