Do it yourself

This level of tariff is indubitably concerning, as it makes numerous Indian MSME businesses, especially those exporting textile, leather goods, small components, jewelry, carpets etc., incompetitive; and in many cases poses an existential threat to the exporting entities. For several MSME the US market contributes a substantial part of their revenue; and these entities were enjoying some advantage over competitors due to lower MFN tariffs. They not only lose this advantage, but become materially incompetitive due to these tariffs.

These reciprocal and penal tariffs, in my view, tantamount to covert economic sanctions on India by the US. The reason cited for the penal tariffs is continued import of crude oil by Indian oil companies from Russia. The Indian government has clearly communicated to the US administration that this reason is not valid, as several other countries, including the EU, which also import crude from Russia are not subject to penal tariffs.

The situation is still evolving as the trade negotiations with the US are still under way, and these high tariffs are not permanent as of now. Nonetheless, the probability of these tariffs staying for a longer term is not zero. It is therefore important for everyone, including businesses, policymakers, and investors, to script a worse-case scenario for themselves and test their preparedness for such a scenario.

Notably, the present tariff action of the US administration is neither a surprise nor an isolated act of aggression against India. In the past 7-8 years there has been a pattern in the evolution of Indo-US relationships. Particularly since 2018, the US administration has been actively looking to base the mutual relationship on equality. President Trump seeking to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues is just a continuation of the evolving pattern. (Read more on this New chapter in Indo-US relations).

It is also pertinent to note that since 2018, the US has withdrawn the benefits under Generalized System of Preferences (GSP); materially tightened scrutiny on Indian IT and pharma compliance; persistently stalled progress on a bilateral trade deal; virtually downgraded the diplomatic status through exceptional delay in appointing an Ambassador to India (Indian mission of the US headed by an interim Chargé d'affaires during January 2021-March 2023 and January 2025 till present day; see details) and causing inordinate delays in grant of VISA appointments to Indians; disgracefully deported illegal Indian immigrants. These are some of the pointers towards the evolving pattern of Indo-US relations since 2018. The tariff spike is simply an extension of this pattern.

Some entrepreneurs, politicians, investors and thought leaders have called for a 1991 (balance of payment crisis) and 1998 like (economic sanctions post nuclear test) response to the situation. They have suggested that the government should use this opportunity to initiate some major reforms, like 1991 and 1998, to further strengthen the resilience of the Indian economy. Many of them see the current situation equivalent to economic sanction (through trade route) and suggest an appropriate response accordingly.

In my view, the Indian economy urgently needs several major reforms, regardless of the outcome of the present trade conflict with the US. The current situation does provide a catalyst and a valid excuse to implement these reforms that may cause some short-term pain to various stakeholders.

In the next few posts, I shall discuss my thoughts on the areas that need urgent reforms and changes, if any, required in the investment strategy in light of the latest US tariffs. Before that it is important to take note of the 1998 crisis, and how the situation in 2025 may be different.

Operation Shakti triggered global sanctions on India

India had maintained a policy of nuclear ambiguity since its first nuclear test in 1974 (Smiling Buddha). Over the years, global non-proliferation efforts intensified, particularly after the Cold War. On May 11 and 13, 1998, India conducted five underground nuclear tests in Pokhran, Rajasthan, codenamed Operation Shakti.

Operation Shakti, triggered a wave of economic sanctions from the US, Japan, Canada, the EU, and international financial institutions like World Bank, IMF and ADB. Notably, Russia, France, and Israel did not participate in sanctions. China issued strong condemnation but refrained from economic penalties.

Under the sanction, most of the non-humanitarian financial aid was suspended. Export of military and dual use technology to India was banned. All defense cooperation and technology transfer treaties were suspended. A freeze was put on loan guarantees and financial assistance. Lending to India by the World Bank, IMF, and ADB temporarily halted/slowed.

The extant government decided to take the global pressure head-on. It steadfastly refused to sign the Comprehensive Test Ban Treaty (CTBT) under pressure. The government also launched an aggressive diplomatic campaign to explain its position, emphasizing strategic necessity and national security concerns. Most importantly, the government unleashed several structural reforms to strengthen the domestic economy. Notably, the government divested its monopoly over core sectors like coal, power, telecom, oil & gas, civil aviation, etc. An ambitious national highway development plan (NHDP) was launched. Several fiscal incentives were provided to promote exports. A special economic zone (SEZ) policy was implemented. Several tax and other concessions were offered to the ITeS sector.

Consequently, the impact of the sanction remained contained. Reforms attracted material private capital flows from global investors. Turbulence in the market was short lived, and within a year the market scaled new highs. Sensex rose from ~3,300 in Jan 1999 to ~5,100 by March 2000, a jump of 50% in 15months.

Overall, the impact of sanctions was marginal.

The sanctions were lifted within two years as India materially helped the world in managing the Y2K crisis; unilaterally announced a “no first use” nuclear doctrine.

Situation in 2025 is different from 1998

The present situation is however materially different from the 1998 situation. First, the present trade action is limited to the US, unlike 1998 when a number of trade partners had imposed restrictions. Second, the Indian economy is now much stronger and materially more integrated into the global economy as compared to 1998. The impact of trade restrictions on the local economy, therefore, could be materially higher. Third, the political situation in India is much more stable now as compared to 1998, when the coalition was more fragile. Fourth, India has strengthened its global strategic position significantly in the past 27years. With several multilateral alliances (G-20, BRICS, QUAD etc.) and bilateral treaties, India has much stronger support from its global partners as compared to 1998.

Also read

New chapter in Indo-US relations

Speculating Trump’s second term

Ambivalent

…to continue tomorrow

My engagement with Indian financial markets began in the late 1980s, at a time when the winds of reform had just started sweeping through the economy. What followed in the 1990s was a structural reset — the kind that lays the foundation for decades of growth, even if its full implications aren’t immediately visible.

The decade of 1990s witnessed –

(i)    An overhaul of the financial sector with abolition of capital controls, opening of doors for the foreign portfolio investors, entry of private banks in the markets, material liberalization of the rules for non-bank lenders (NBFCs); laying foundation for pension and insurance sector reforms;

(ii)   Significant liberalization of the industrial licensing system; material dilution of the Monopolies and Restrictive Trade Practices Act and Foreign Exchange Regulation Act, de-reservation of several articles from Small Scale Industries, introduction of Liberalized Exchange Rate Management System (LERMS), etc.;

(iii)  India becoming a signatory of the World Trade Organization. (Of course, India was a signatory to the GATT since 1948);

(iv)  Simplification of excise classifications, introduction of VAT and MODVAT, material reduction in maximum marginal rates of IT Act and simplification of rules;

(v)   Beginning of disinvestment and divestment process in public sector enterprises (PSEs). The government initiated disinvestment of its stake in many non-strategic PSEs. More importantly, the government divested government monopolies in core sectors like Oil& gas, Power, Coal, Roads, Ports, Civil Aviation, Communication, etc.

(vi)  India gained recognition as a major center of information technology (IT) and pharmaceutical research and development center in the world. For the first time, thousands of Indian professionals (Software Engineers & developers, Bankers, doctors and Managers) started working and travelling across the globe, unlike decades when Indian worker mostly got low paid blue-collar jobs.

(vii) Strategically, India was recognized as a country having a nuclear deterrent. Significant advances were made in development of missile and space research technologies.

All these developments gain higher importance when we consider that this was the era of significant political instability (minority governments 1989-1995, and then three general elections during 1995-1998) and financial constraints (Balance of Payment crisis in early 1990s, economic sanctions post nuclear tests in 1998, massive stock market scams, financial sector crisis and bankruptcy of multiple development financial institutions like UTI, IDBI, ICICI, IFCI).

More notably, till 1990 Indian and Chinese economies were mostly at par. We could even say that India had a marginal edge over China as it had wider global acceptance due to its democratic traditions. China also started its economic transformation around the same time. In 35 years, the Chinese economy has sprinted miles ahead of the Indian economy. No one, not even Indian politicians, is claiming that we are even in the race to bridge this gap in the foreseeable future.​

This morning, I am writing this after reading about 20 equity research reports. All these reports, without even a single exception, have expressed worries about inflation and CAD due to the spike in crude oil prices in the global markets. It felt like déjà vu.

Back in 1990-91, as the Gulf War broke out, crude prices spiked and sparked the same anxiety. Three decades on, monsoon dependency and crude oil shocks remain headline risks for the Indian economy. Three decades later, nothing seems to have really changed - we’re still haunted by monsoon uncertainties and oil shocks.

Despite a decade of brave reforms and a globalized capital base, India’s macro vulnerabilities remain eerily similar. Our reforms deepened markets and broadened participation, but left key structural risks unaddressed.

So, the question we need to ask is “where did we lose our way in the past couple of decades?”

To me, India’s growth story remains compelling, but ignoring its macro vulnerabilities is difficult. The past teaches us resilience but the future demands vigilance.

This global flashpoint could have local consequences

The Israel-Iran conflict differs starkly from localized India and Pakistan military engagements. With China and Pakistan openly backing Iran, and Russia potentially supplying critical defense equipment should the U.S. directly support Israel, the geopolitical fault lines are deepening.

For India, this presents both risks and opportunities. The alignment of China, Pakistan, and potentially Russia with Iran could provide India an opening to mend recent strains in its ties with the U.S. and Europe. Strengthened diplomatic and economic alignment with the West could bolster India’s strategic position, particularly in securing foreign direct investment (FDI) and defense collaborations.

However, the immediate concern for India lies in its energy security. The Middle East accounts for a significant portion of India’s oil and gas imports. A protracted conflict could disrupt supply chains, spike global oil prices, and inflate India’s oil import bill. This would exert upward pressure on inflation, widen the current account deficit, and weaken the INR, potentially forcing the government to stretch its fiscal resources to stabilize the economy. While India is unlikely to be directly or indirectly involved in the conflict, the economic fallout could still be substantial if the situation escalates.

Uncertainty prevails

Despite these risks, there’s reason to believe the conflict may not spiral out of control. Cooler heads may prevail, leading to a ceasefire to avert a wider war. If this scenario unfolds, the impact on India’s economy and markets is likely to remain limited. Indian enterprises with economic interests in both Iran and Israel—spanning sectors like technology, agriculture, and energy—may face temporary disruptions, but the broader market impact could be contained.

However, should the conflict intensify and Western forces enter the fray, the consequences could be far-reaching. Disruptions in global trade routes, particularly through the Strait of Hormuz, could choke energy supplies, sending shockwaves through India’s economy. Such a scenario would test India’s policy framework, with missteps potentially jeopardizing long-term energy security, FDI inflows, and employment opportunities in the Middle East, where millions of Indian expatriate work.

What Investors should do?

For Indian investors and traders, the heightened volatility in global markets presents both temptation and peril. Navigating such uncertainty requires specialized skills that most retail investors lack. Attempting to capitalize on market swings driven by geopolitical developments is a high-risk game best left to professionals. The prudent course is to stay on the sidelines, closely monitor developments, and avoid impulsive decisions.

India’s policymakers, too, must tread carefully. A balanced approach that safeguards energy security, preserves economic ties with both Iran and Israel, and capitalizes on potential geopolitical alignments will be critical. Any miscalculation could undermine India’s long-term economic interests, particularly in a region as vital as the Middle East.

The road ahead

As the Israel-Iran conflict unfolds, India finds itself in a delicate position. While direct involvement is unlikely, the economic and geopolitical ramifications demand close watch. For now, the hope is that diplomacy prevails and a broader conflict is averted, minimizing disruptions. However, investors and policymakers alike must remain cautious, prioritizing stability over speculative risk-taking. In these uncertain times, watching from the fringes may be the wisest strategy.

My personal view is that the actual agenda of governance might have some shades of the election rhetoric but its actual path may not materially deviate from the trend seen in the post GFC (2009) period. At this point in time, I do not expect to sight any black swan in global economics and/or markets. With this caveat, let me summarize the current market speculations and its likely impact on India.

Trade tariffs

Trump has been speaking about imposing high tariffs on the US merchandise imports to promote local manufacturing, cut US trade deficit and strengthen USD. He has been suggesting 20% universal tariff on all imports, 60% tariff on imports from China and restrictions on the trade partners that he believes have artificially undervalued their currencies to gain trade surplus with the US. India is seen as one of these currency manipulating countries.

The administration will have to assess the impact of higher tariffs on businesses that are heavily reliant on imported inputs. Besides, the present US infrastructure and worker pool may not be adequate to onshore much of manufacturing activities. The impact of higher tariffs on the monetary policy objectives will also need to be calibrated.

Trump 1.0 started a manufacturing renaissance of sorts in the US, through tax incentives, tariffs and favorable skilled worker immigration policies. The Biden administration has carried forward the Trump 1.0 agenda and provided added further impetus though It would be reasonable to assume that trend will continue. There may be some random measures taken to address the political constituency, but a universal restrictive tariff policy (if at all implemented) will take much longer, maybe a couple of years, to evolve. A trade taken on the likely contours of the tariff policy may be frustrating.

In this context, it would be pertinent to note the comments of Michael Feroli, chief US economist at JPMorgan. Feroli said, “One path sees tax cuts and deregulation unleashing animal spirits, thereby boosting productivity growth and GDP outcomes while keeping inflation well-contained. The other path foresees policy uncertainty hindering growth, while trade and immigration restrictions impart a stagflationary bias.”

Collateral

Presuming Trump carries out his threat of a 60% tariff on Chinese imports – it may have consequences for most of the trade partners of the US and China. Some of the tariff hikes may be absorbed through CNY devaluation like China did in 2018; but some of it will have to be shared by the US consumers and producers. This essentially means higher US inflation and lower corporate profitability. China may dump the surplus production on Non-US importers, impacting local producers in those markets – thus exporting deflation throughout the world.

The Indian chemical sector, for example, which has already been suffering from Chinese price cuts may suffer further damage. Considering the massive capacity addition in the past 5-6 years and leveraged balance sheets, some of these companies might not be able to survive.

Energy policy

Trump has designated Chris Wright to head the energy department. Wright has been a known supporter of fossil fuels, disregarding the threat of climate change. He believes that the oil and gas industry has brought security and power and development to the United States, and global emissions aren't going down with greater focus on clean energy. He famously rejected carbon dioxide as a pollutant, claiming “carbon is essential for life”.

In the words of Wright, “Climate change is a real and global challenge that we should and can address. However, representing it as the most urgent threat to humanity today displaces concerns about more pressing threats of malnutrition, access to clean water, air pollution, endemic diseases, and human rights, among others.” He therefore advocates a need to bring down the price of energy and secure energy independence for the US.

Anticipating higher US oil production and return of thermal power in favor, the traders are placing a trade on fossil fuel – buying coal miners, fracking companies and drilling equipment manufacturers.

If Trump-Wright energy doctrine is actually implemented it would mean – collapse of United Nations Climate Change Conference (COP), sharp rise in the US oil production and exports resulting in lower global crude prices, decline in clean energy subsidies resulting in poor demand growth for solar energy and EVs.

In the past one-decade massive investment has been made in the production and adoption of clean energy solutions for electricity and mobility needs. The viability of these investments, especially in emerging economies where viability gap is already funded through fiscal support, would need to be reassessed.

Collateral

A 20% duty hike on the Indian exports may hurt some of the Indian exporters, as they may not be able to pass on the whole of the duty hike to the importers.

Cheaper oil may hurt the economies of OPEC countries, which are major trade partners, investors and employment providers for India.

Cheaper oil may help current account, inflation and INR.

Immigration policy

Immigration was a core issue in the entire campaign of Trump. He promised strict action against all illegal immigrants and several restrictive actions against the legal immigrants. We have heard similar rhetoric during the election campaign of Geroge Bush jr, Hillary Clinton, and Trump 1.0 etc.

It is widely accepted that ~47 million immigrants form a critical element of the US economy. They support the US businesses by providing a highly skilled workforce; boost federal revenue by paying taxes and contribution to social security; support the economy through high rates of savings and investments; and are an important consumer group.

President-elect Trump has indicated that his administration plans to carry out mass detentions and deportations of millions of immigrants, including long-term residents, by declaring national emergency and deploying armed forces to carry out deportation exercises. This could lead to family separations and negative mental and physical health consequences. This could potentially create widespread civil unrest, affecting the mental and social health of millions and the health of several small businesses who employ these immigrants. It is also feared that there could also be higher taxes on legal foreign workers.

Collateral

Uncertainty about jobs and residential status and higher taxes could result in lower job opportunities for the Indian workers employed in the US, negatively impacting remittances. Tougher VISA norms and immigration policies may also have some negative impact on the margins of the Indian IT services companies.

Geopolitics

George Washington implemented a policy of isolationism and neutrality with regards to the internal affairs of other nations. The successive US presidents followed this policy till the president Wilson was forced to change it in the wake of threats to the American interests that emerged from the first World War. In April 1917, the US entered the war with Germany “to make the world safe for democracy”. In the past 107 years, the US has followed this doctrine in its foreign policy.

Trump has now vowed to revert to the policy of isolationism and neutrality. Many geopolitical experts fear that this will end a major deterrent to the global expansionist forces like China and Russia, and could potentially unleash some major wars.

In my view, Trump may not hurry to a policy of isolationism and neutrality. I believe the US derives most of its power from the bombs they dropped in Hiroshima and Nagasaki. This nuclear deterrent has kept most expansionist ambitions at pay in the post WWII era.

The promise of liberty, fairness and equal opportunity has tremendously enhanced the US’s power. It has enabled it to attract and retain top talent from their adversaries like Vietnam, Japan, China, Russia, East Europe, Iran, Cuba, etc. and even talent starved countries like India, Pakistan, Bangladesh etc. The US will be able to retain its supremacy only as long as these immigrants are loyal to the US and the US administration is ready to bomb any country to protect the world order.

(PS: A large number of people believe that “the save democracy” democracy doctrine of the US is a façade to camouflage its own expansionist agenda. There are strong arguments on both sides of this belief. I would not like to get into that debate here.)

Collateral

If the US does revert to the policy of isolationism and neutrality by cutting aid to the countries like Ukraine and Israel, we may witness widespread unrest globally. This will unfold the worst human tragedy since WWII.

Besides the above mentioned factors, there are speculations about the trajectory of USD, Rates, Crypto, Gold during the second term of Trump. I believe that these all are derivative factors which would depend on the macro policies of the new US administration. It may be too early to call a good trade on these.