Will he, or won’t he? This seems to be the key question being asked around the world as Donald Trump stages a comeback to the White House as the 47th President of the US. Trump has vowed to raise tariffs on imports into the US as part of his plan to rebuild the American economy as the world’s greatest one, leaving policymakers and industry on edge around the planet.
Trump’s proposals on tariffs, which were a part of his election campaign for the presidency, aim to lower corporate tax rates for companies manufacturing in the US to 15% from the current 21%; he also plans to hike tariffs by as much as 60-100% on Chinese imports into the country. For imports from other countries, Trump intends to raise tariffs by 10-20%. These tariff actions could upend global trade and fuel inflation and tighten monetary policy across the US and the world, even if they may boost the American economy in the short run.
India-US trade
For now, India seems to have been spared. Trump has pledged higher tariffs on three of the US’s largest trading partners—Canada, Mexico and China. He has promised to impose a 25% tariff on imports from Canada and Mexico until they checked drugs and migrants crossing over to the US. Plus, he has vowed to impose an additional tariff of 10% on imports from China. Mexico and Canada are reviewing the announcement.
In India, the government is closely monitoring the developments in the US to assess the impact of any such move on the domestic economy that is in the midst of a slowdown, and exports that seemed to have picked up pace only recently. While trade between India and the US has grown steadily over the years, the relations between the two countries have been rocky at times, with numerous disputes taken up at the World Trade Organization and demands by Washington—to lower tariffs and provide more market access—that have often not been accepted by New Delhi.
India’s Commerce Secretary Sunil Barthwal has, however, pointed out that trade between India and the US has grown over the course of four US presidencies, indicating greater economic integration of the two countries. “India’s exports to the US have grown steadily between 2001 and 2023, which coincides with the tenure of four US Presidents,” he said at a monthly press briefing on November 14 when asked about the impact of the US presidential elections on trade with India. “Whatever may be the presidency, we are integrating our value chains with the US, the way we are integrating the two economies through various agreements, including the Indo-Pacific Economic Framework for Prosperity (IPEF) and bilateral mechanisms. We are able to have sustained growth in terms of our share with the US,” Barthwal said, adding that he expects this integration to continue growing.
According to commerce ministry data, America’s imports from India rose from $9.7 billion in 2001 to $87.3 billion in 2023. India’s share in the US’s imports increased from 0.9% in 2001 to 2.8% in 2023. In the same period, US imports from India increased by a CAGR of 10.48%, compared with a 4.76% rise in imports from the rest of the world to America.
The US remains India’s top trading partner, with more than $190 billion in trade; India also serves as a base for major US tech firms like Google, Amazon, and Apple. And India’s IT sector relies on the US for 80% of its export revenue.
This is the second term for President-elect Trump, who will be sworn in on January 20, 2025. During his first term from 2017 to 2021, India-US trade relations saw several issues crop up and the then US Trade Representative Robert Lighthizer was seen as an arch protectionist and tough negotiator.
“From Trump’s perspective, India has high tariffs, and he has repeatedly labelled it the ‘tariff king’ over the past five years, citing examples like the 100% tariff on Harley-Davidson motorcycles and 150% on American whisky. Trump’s emphasis on ‘reciprocal tariffs’ could pressure India to consider tariff reforms, even though India’s rates are within WTO norms,” points out Ajay Srivastava, Founder of economic think tank Global Trade Research Initiative (GTRI). India’s average tariff of 17% is indeed higher than the US’s 3.3%, but comparable to countries like South Korea (13.4%) and China (7.5%), he highlights.
“Tariff is an issue very dear to him and I believe he has singled out India. I believe he will soon be sending out a list of items on which he wants a reduction in tariff. We have done this exercise in his last administration and when we check our imports under that tariff list, we see that most of these come from China and not from the US. If India lowers the duty, the benefits will go to China and that’s a dilemma for India,” he says. Second, the US would want India to lower tariffs, mostly on agricultural items, and that is a big no-no for India, he adds.
Anup Wadhawan, India’s former commerce secretary, is of the view that the Trump presidency will not in any way even remotely undermine the basis of the bilateral relationship, and issues come up in any relationship. “Even in President Trump’s last term, the US had flagged certain issues with India, including concerns over medical devices, duties on motorcycles and market access for agriculture produce, dairy and animal products,” he says. The US also withdrew the Generalised System of Preferences (GSP) benefits for India based on a broader logic impacting other countries as well, he points out, but notes that none of these led to any disruption or acrimony and the two countries chose to work towards resolving these issues through discussion.
Wadhawan, however, underlines that Trump’s view of reciprocal trade confined to goods alone is very partial and unfair. “We need to factor in economic flows between countries across goods and services, including services provided by e-commerce and digital companies like Google, Meta, Amazon, and Microsoft, which are US firms and profit hugely on a cross-border basis, to assess how balanced any bilateral relationship is. If we do that, the US is one of the biggest beneficiaries in a highly ‘non-reciprocal’ manner under the post-war global economic framework and can hardly posture as a victim of unfair trade,” he points out.
A key worry remains that higher tariffs by the US could lead to retaliatory tariffs by other countries and cause upheaval in the global trade architecture. Policymakers believe that an across-the-board tariff hike would impact all countries equally and eventually any benefit or disadvantage to India’s exports would depend on the country’s competitiveness. V. Anantha Nageswaran, Chief Economic Advisor to the Government if India, has warned of growing protectionism and said that the world has entered an era of de-globalisation. Global growth and global exports should not be expected to lift domestic exports.
But the impact of any tariff hike on China would have to be assessed and a strategy would have to be devised to ensure that India is able to benefit from it and not just countries like Vietnam, say experts. India could also gain from the US strategy of China+1.
Higher tariffs by the US on Chinese goods have also fuelled worries of dumping by China into India that could impact domestic manufacturing and exports. For now, concerns over India’s exports have abated to some extent and global trade seems to be normalising despite the continued conflict in the Middle East. Provisional data revealed that India’s exports grew at the fastest pace in 28 months in October 2024. India’s merchandise exports increased by 17.25% in October to $39.2 billion while imports grew 3.9% to $66.34 billion in the month.
State of the economy
However, as North Block gets busy with the preparation of the Union Budget for 2025-26, officials are taking a hard look at the economy and the various factors at play. A slowdown in economic growth in FY25 had been factored in, with GDP growth estimated at 7% in the current fiscal, down from 8.2% in FY24.
A good monsoon seems to have revived rural sentiment, but urban demand seems to be slowing down as inflation remains sticky. “The festive season paints a mixed picture for consumption. Demand is holding up in rural areas and Tier II/III cities, but metros and industrial demand are weak. We believe India’s economy has entered a cyclical growth slowdown. We see rising downside risks to our GDP growth projections of 6.7% YoY in FY25 and 6.8% in FY26, both of which are already below the Reserve Bank of India’s projections,” said a recent Nomura report.
Rajani Sinha, Chief Economist at rating agency CareEdge Group, says the economic slowdown is not as steep as was being projected. “While there was some slowdown in high-frequency data such as PMI, industrial production, [and] IIP in the second quarter of the fiscal, these seem to have shown some improvement in October. However, GST collections and corporate results still show some moderation,” she notes.
“There are various factors at play that will impact India’s growth this fiscal. While the rural economy is doing well post the monsoon, inflation remains a problem and will continue to impact interest rates. The external situation also remains highly volatile,” says a top finance ministry official.
Capital investments—both public and private—have remained weak this fiscal and officials are hopeful that government capex will pick up in the next few months. However, a recovery in private capex is still far from fruition. According to CareEdge Ratings, the public capex story has largely been subdued in the first half of the fiscal as the central and aggregate state capex contracted by 15.4% YoY and 10.5% YoY, respectively. However, it believes there is a potential for recovery in capex during the remainder of the fiscal. On the corporate capex front, the aggregate capex of a sample set of companies (1,074 non-financial listed companies) was seen at Rs 9.4 lakh crore in FY24, marginally lower than the previous year.
“Looking ahead, there remains potential for recovery in public capex during the remainder of the fiscal year. On the private capex front, there is encouraging order book scenario of the capital goods and infrastructure sectors, and this could be indicative of a likely pick up in capex in other sectors going forward,” says Sinha.
The government is also closely watching the developments in the US as well as the conflict in the Middle East that could impact oil prices if it escalates further, Sinha says. However, with Trump’s focus on more drilling, there is expectation that the US will increase crude oil production and global oil prices will remain low.
The average price of India’s crude oil basket remains comfortably placed at $73.1 (as on November 25), against the RBI’s baseline assumption in the April monetary policy review of $85 per barrel in FY25.
But crude oil isn’t the only factor that impacts inflation in India, as has been evident in the past few years with food prices, especially vegetables, remaining stubbornly high. In October 2024, retail inflation as measured by the consumer price index rose to a 14-month high of 6.2% and vegetable inflation was at a 57-month high of 42.2%. The latest projections are likely to further delay a rate cut by the RBI’s Monetary Policy Committee (MPC), which will be meeting between December 4 and 6.
“Current trends suggest that inflation in the second half of FY25 may exceed the RBI’s October projections, potentially delaying the start of a rate-cutting cycle,” Sinha of CareEdge says, adding that the agency anticipates that headline inflation will fall below 5% by Q4FY25, driven by a moderation in food inflation. “This would create an opportunity for the MPC to consider a 25-bps reduction in policy rates in February meeting,” she says.
Monetary policy will also depend on developments in the US, as higher spending and inflation could keep the US Federal Reserve from its easing cycle.
“The US economy at the current juncture has been performing well with robust growth and lower unemployment levels. The proposed tax would result in higher demand, while the higher tariff will turn out to be inflationary… Overall, such policies will strengthen the dollar, push bond yield higher given the expansionary fiscal measures and could even drive capital inflows,” said Jahnavi Prabhakar, Economist at Bank of Baroda, in a recent note, adding that this will lead to volatility in the bond and forex markets.
When and how these proposals are implemented are also a key monitorable for policymakers in India. Finance ministry officials have underlined that maintaining the growth momentum and ensuring price stability will continue to be the guiding principle as the government finalises the contours of the next Union Budget.
The next few months will set the stage for how the US government moves ahead on its economic agenda and India’s policy responses to the myriad issues the economy is grappling with. Watch this space.
@surabhi_prasad