Do it yourself: Trump

Showing posts with label Trump. Show all posts

Thursday, October 9, 2025

2025: Roadmap for policy imperatives

The India specific actions of President Trump in the past six months have evoked a varied response from various stakeholders.

· The policymakers have been quite guarded in their response. Prime Minister Modi has rhetorically emphasized on the need to be self-reliant and adopt Swadeshi (Made in India products), but so far, we have not heard any specific policy or plan to counter the US aggression. Most of the concerned ministers and bureaucrats have repeatedly expressed hope that India will manage to finalize an “honorable” trade deal before the end of 2025. The only detail they have shared is that India shall not compromise on the interests of its farmers’ and energy security concerns. Prima facie, the bureaucratic and diplomatic effort is to “restore status quo ante”, to the extent possible.

· Industry associations also seem to be preferring a “settlement” route, whereby the US administration withdraws punitive measures (tariff and non-tariff) and Indian exporters agree to bear some of the reciprocal tariffs.

· The IT services industry seems to be adopting a “take whatever comes on the way and move on” approach; fast reconciling to a situation where the extant H1B visa does not exist. They are apparently working on a broad mitigation strategy, including increasing their US on ground presence, near-shoring, off-shoring to India, sharing the increased cost with clients, etc.

· A handful of entrepreneurs and professionals have suggested that we “exploit this opportunity” to unleash a new round of economic and policy reforms in the country by beginning an “innovation revolution” in the country. Though, most of their views are available in the form of media posts and interviews, and not much specifics are available in public domain.

Overall, my impression is that a large majority of the stakeholders would be delighted if the pre–Liberation Day (02 April 2025) situation is restored by the Trump administration. They would be much relieved, even if reciprocal tariffs are retained and punitive measures like 25% penal tariffs, 100% tariff on branded & patented drugs, and US$1,00,000 fee on H1B applications are revoked. Regardless of all the rhetorics and social media proclamations, the enthusiasm for ushering Reforms 3.0 (after 1991-92 and 1998-99) is much less.

In my view, we should take this opportunity to reinforce the foundation of our economy, add new engines of growth, and make our economy more sustainable. This would require coordinated efforts by the government, entrepreneurs, innovators, local governments, civil society, academia, and industry.

I suggest two level effort to achieve these objectives – (1) Business level efforts and (2) Structural changes

Business level efforts

Trade & Manufacturing

Diversify markets: Reduce reliance on the US by deepening ties with ASEAN, EU, Africa, Latin America.

FTAs & supply-chain corridors: Accelerate trade agreements with EU and UK; expand India-Japan supply chain partnerships.

Technology & Capital

Domestic R&D: Incentivize AI, semiconductor, and biotech innovation through tax breaks and PPP models.

Ease of capital flows: Simplify compliance for foreign investors; fast-track dispute resolution.

Upskilling at scale: Invest in digital skills, advanced manufacturing training, and vocational education.

Geopolitics & Defense

Strategic diversification: Strengthen ties with EU, Japan, and ASEAN to counterbalance US unpredictability.

Defense indigenization: Fast-track Make-in-India defense projects, reducing dependency on US hardware.

Structural changes

While business level efforts improve resilience of the India economy, it may not enhance sustainability of the growth or catapult our growth to a much higher trajectory, that is much needed to attain the goal of “Viksit Bharat (Developed India)” in the next couple of decades. For this we need to implement some structural reforms through transformation of our growth paradigm. In particular, we need to-

· Completely shed the colonial mindset and make our development plans aggressive, forward looking and large;

· Bridge a variety of deficits prevalent in our country – especially growth capital deficit; skill deficit; trust deficit; and compliance deficit;

· Develop a scientific temper as a society, eliminating superstitions, ostentatiousness, intolerance, and ignorance, from our daily life.

· Transform governance structure to minimize corruption.

The following three examples of development initiatives emphasize my points.

· Develop 6 new green field global cities of the size of one Singapore each. Locate these cities in each region (North, West, South, East, central and North East) of the country. Invite top global businesses, infra builders and universities to build these world class fully integrated sustainable and self-sufficient cities in the next 10-15 yrs. These cities should have the best infrastructure; dedicated campuses for top global businesses, especially technology, and research; campuses of top global universities where Indian and foreign students could study. These cities should become global hubs of trade, finance, innovation and model living.

These cities may be managed by a board elected by the representatives of investors, institutions and residents. The board may be fully empowered to formulate rules and regulations regarding labor, property, indirect taxes, and other matters of governance and maintenance of these cities. Once successfully established, states may be encouraged to model their metropolises on these cities.

· Develop 6 new green field global standard recreation and tourism centers, similar to Las Vegas, Macau, Phuket etc. on build operate (BO) basis. These centers must have best in class hospitality, retail and mobility infrastructure. Apply exceptional rules for these centers with regard to alcohol consumption, gambling, hotel management, prostitution etc. The objective should be to divert outbound tourism from India to these centers and encourage inbound international tourist flow. A special armed force may be raised for maintaining law & order in these centers.

Simultaneously, the existing places of tourist interest in the country may be developed in terms of cleanliness, hospitality, accessibility, law & order, etc. The tourists arriving in the special centers may be encouraged to visit these places of historical and cultural importance.

· Religion has always been at the core Indian ethos. Traditionally, it has been the influence of religion that brought the concepts of scientific inquisition, righteousness, moral rectitude, social responsibility, environmental sustainability, debt management, HR management, and just & fair taxation, etc. in the society.

Post Independence the State has been over focusing on micromanaging businesses and ignoring key social issues. This has weakened the core fabric of Indian society. Consequently, places of worship have degenerated from being centers of learning & spiritual evolution to shelters for hatemongers, fearmongers, power seekers, and wealth hoarders. Many of these promote superstitions and block scientific inquiry to the detriment of society at large.

In my view, if we want to make this century belong to India, then Indian State—

o should leave business completely to private enterprise;

o play a much larger role in social awakening and create an enabling environment of mutual trust, self-motivation, empathy and compassion;

o make the Temple (of course including Mosques, Churches, Monasteries, Gurudwaras, Mutts, Agiyaris, Derasars and others) play a larger evolutionary role in progress of the society, rather than continuing to de-generate further and stay a stumbling block in the path to socio-economic progress.

The State must realize and accept that politicians and bureaucrats are mostly handicapped insofar as their capability to run businesses is concerned. They should therefore focus on securing borders, developing social & physical infrastructure, maintaining law & order and promoting social harmony.

Tuesday, October 7, 2025

Do not squander the opportunity

The Indo-US relations have never been linear and secular like Indo-Russia (Indo-Soviet) relations. Moreover, the Indo-US relations have mostly been transactional and opportunistic; with very little connect on cultural and social level.

Both countries have based their strategies on their respective abilities to exploit the available opportunities. In the past three decades, India has significantly gained from the shortages of highly skilled human resources in the US. We have also shared the gains (with other emerging economies) from the US strategy of relocating their manufacturing processes. The US has benefitted from selling technology, energy and defense equipment to India. Besides, India has been an attractive high growth potential opportunity for US capital.

Evidently, the US administration now seeks to redefine this transactional relationship. The present strife in the Indo-US relations may therefore sustain much longer than what most of us would have expected a couple of months ago.

The Trump shock: what changed

In recent months, India’s relationship with the United States has entered a turbulent phase. President Donald Trump’s administration has imposed penal tariffs targeting India’s labor-intensive exports, rolled back strategic assurances, and reignited ties with Pakistan in ways that ignore India’s security concerns. The tightening of H-1B visa rules and deportations of overstaying Indian citizens have also strained people-to-people ties.

This shift has disrupted Indian business models that relied heavily on US consumers, technology, capital, and immigration pathways. The transactional nature of Indo-US relations has always meant that strategic alignments could shift rapidly. The Trump administration’s America-first strategy has redefined the terms of engagement.

Under the circumstances, it would be a normal strategy for the US businesses and policymakers to work on an India+1 strategy for their merchandise, human resource and strategic support requirements. The policymakers would want Indian businesses to invest in the US to “Make in America” and “Hire Americans”.

It is therefore important that the Indian businesses and policymakers have a long-term strategy to mitigate the impact of the change in American strategy and ensure a sustainable growth for the Indian economy.

Lessons from 1998: Turning sanctions into strength

This is not the first time India has faced strategic setbacks from the US. In 1998, following nuclear tests, India faced severe sanctions. Rather than bowing to pressure, India leveraged the situation to accelerate reforms and investments. These reforms laid the groundwork for India’s high growth phase in the 2000s.

The subsequent governments continued to focus on increasing “self-reliance” and “energy security”. However, momentum slowed down considerably as India grew comfortable with much improved relations with the US, Japan and the EU, in the past two decades.

(More on lessons from 1998 tomrrow)

Why this is an opportunity, not just a setback

Just as in 1998, India can turn adversity into opportunity. Trump’s policies are part of a broader global trend: protectionism, supply-chain re-shoring, and weaponization of trade.

History shows that India thrives when external shocks force inward reform. The Trump administration’s adversarial stance should not be viewed as an existential threat but as a catalyst for bold domestic policy shifts.

Taking a myopic approach—by rushing to invest in the US to appease Trump—would dissipate this opportunity. Instead, India should use this moment to:

· Build resilience

· Accelerate reforms

· Position itself as an important global manufacturing and innovation hub

…to continue tomorrow Lessons from 1998

Wednesday, September 3, 2025

US Tariffs - Imagining the worst case

The US administration has imposed a 25% penal tariff on the goods imported from India, with few exceptions. The reason cited for this penal action is continued import of crude oil from Russia by the Indian refiners, despite the US administration insistence that sales proceeds from such oil sales are being used to finance the Russian war on Ukraine. These tariffs are over and above the MFN tariffs prevalent prior to 7th August 2025, and 25% reciprocal imposed with effect from 07th August.

Considering the exemption for several items that are critical for the US supply chains, e.g., mobile phones, certain metal items, pharma, semiconductors, energy etc., the effective tariff rates on Indian exports to the US are estimated to be ~33%.

India has termed this penal action “unfair, unjustified, unreasonable”. The public stance of the Indian government is that buying Russian oil is critical for our energy security, and it is our prerogative to decide from where to buy.

Considering the current seemingly inflexible stance of both the parties on this issue, it would not be unreasonable to assume that these penal tariffs may stay, at least for a few more months, till a breakthrough in trade talks is achieved. Reportedly, the Indo-US bilateral trade talks are continuing and the negotiators are hopeful that a bilateral trade agreement (BTA) may be achieved in the next few months.

However, assuming the worst case (penal tariffs stay for a longer term than presently estimated), the repercussions could be serious for the Indian economy, in general, and exporters in particular. Some of the consequences of sustained penal tariffs could be listed as follows. Please note that these are based on worst case assumptions and not a base case.

Capital and jobs drain: If the penal tariffs sustain, a large number of SMEs, catering mostly to the US demand, especially in sectors like textile, jewelry, carpet, could think of relocating their manufacturing base (fully or partially) to a more tariff friendly jurisdiction like UAE, Oman, Egypt etc. This would result in material capital outflow and loss of jobs for local workers.

Job losses and labor migration: The loss of business due to lower exports to the US is likely to affect the labor-intensive SME sector the most. Various estimates are suggesting a loss of over one million manufacturing jobs directly. There could be material secondary job losses also as exporters scale down their businesses and workers migrate to their native places. This could adversely impact the already struggling private consumption growth and household savings.

Capital controls: India has traditionally run a trade surplus with the US. Loss of exports to the US market, may erode this surplus, adversely impacting the overall trade balance of India. To manage this widening of trade deficit, the government might consider, like it did in the 2013 BoP crisis, imposing some capital controls like reducing limits under LRS remittance, capital investments (outbound FDI) through automatic route, etc. It may also consider liberalizing rules for FDI in sectors like retail trade, increasing competition for the local businesses.

Uncertainty over pharma and services: As of now, pharmaceuticals and services are not covered by the reciprocal and penal tariffs. These two together form ~45% of total Indian exports to the US. If the two sides are unable to find a solution to the current impasse, the US may consider imposing some tariff or non-tariff barriers on pharma and services also. Though not on the board this morning, in the back of minds it must be bothering many entrepreneurs and investors. Even the global corporations making large investments in setting up GCCs in India, would be mindful of this risk and slowdown their future investment plans.

India+1: Presently, it may not be viable for a lot of American importers to immediately replace Indian imports with other countries. However, to mitigate a long-term risk, American importers might explore developing vendors in other countries, even if it costs a fraction higher. This clouds the long-term prospects of export growth for the Indian vendors, even if the present tariff impasse gets resolved in the next few months.

Wider sanctions: To increase pressure on India, the US administration may enhance the scope of penal tariffs to non-tariff restrictions (effectively sanctions like 1998) to include sale of critical defense components, and technology transfer agreements etc. This may adversely impact, for example, the plans to develop local fighter jets and develop a local semiconductor ecosystem.

Remittances: Sanctions and/or fear of sanctions can materially affect remittances from the US to India. On the positive side, many NRIs can accelerate their remittances to preempt remittance tax, restrictions on remittances to India or freezing of assets on some convoluted pretext (This has already happened with Russians and Iranians). On the negative side, VISA restrictions, cancellation of Green cards and H1Bs etc., may impact remittances adversely to some extent.

Uncertainty for tech workers and students: For the past many years, India has sent the largest number of tech workers and students to the US. Escalation in trade conflict could impact this trend adversely. Moreover, dark clouds of uncertainty may engulf the workers and students already present in the US or planning to travel to the US in near term. There are already reports of several Indian students (present and prospective) suffering from extreme stress and depression.

Rise in Chinese threat: To mitigate the impact of the US tariffs and potential sanctions, the Indian government has already enhanced its engagement with the Chinese government and businesses. Reportedly, India has shown inclination to relax several restrictions on the Chinese businesses, capital and products. This is in spite of the past history of mistrust and deceit, and recent Chinese participation (against India) in Operation Sindoor. A liberal access to the Chinese capital and technology might seriously compromise the security of the country; and potentially create a gulf between the government and defense establishment.

I am definitely not suggesting that the government of India should accede to the unfair and unjust US demands and sign an unfavorable trade agreement. I have just listed some pointers for adjusting investment strategy, should things take a turn for the worst.

Thursday, August 21, 2025

A visit to the street

2025 is proving to be an interesting year for traders in the Indian stocks. The traders have faced multiple challenges in the past eight months; and had some good opportunities to make extraordinary profit. More notably—

What made traders’ life tough

· The external environment has been volatile. Geopolitical conflicts in the Middle East had escalated materially. The war between Russia and Ukraine continued and developed a new trade/tariff angle for the Indian economy. India engaged with Pakistan in a small but intense war that could have serious long-term repercussions for regional geopolitics. These events caused sharp volatility in the market, causing exacerbated margin calls and losses to the traders.

· The US imposed reciprocal (25%) and penal (25%) tariffs on imports of merchandise from India, making Indian exports to the US significantly uncompetitive in comparison to the traditional competitors like Vietnam, Bangladesh, Sri Lanka, Turkey, Indonesia, Ecuador, etc. This led to a sharp correction in the stocks of companies drawing material export revenues from the US.

· Economic growth of India has been stable but no acceleration is seen. The demand (both consumption and investment) has remained subdued, impacting consumer companies that were over owned by traders and investors alike.

· Earning momentum has stalled for the past few quarters, with earnings growing in single or low double digits. The valuations of several popular and fancied sectors and stocks have witnessed some de-rating, but still continue to be in the realm of “questionable” for a large majority of stocks.

· While the implied volatility (VIX) has remained low, the realized volatility experienced by the traders has been elevated. Also, sector rotation has been swift and painful. Stocks from sectors like IT services, Pharma, FMCG, Realty and smallcap that were doing well couple of years ago and were over owned have noticeably underperformed YTD2025. While sectors like Auto, Metals and financial services that were under owned and performed poorly have outperformed.

What worked for the traders

International equities, precious metals and crypto assets have done exceedingly well YTD2025. Traders who had invested enthusiastically in Asian equities (especially greater China) a few years ago and were suffering losses have managed to recoup most of their losses. Crypto assets have provided phenomenal return, while gold and silver have also fared very well.

· Internationally, the worst performing markets in the Post Covid period, especially, China, Hongkong, and Japan, have been top performing markets in the past one year. While India has been one of the most notable underperformers. In USD terms, India has yielded a negative return of ~5% in the past twelve months.

· Precious metal and crypto assets have done exceedingly well for Indian investors and traders in the past twelve months.

Thursday, August 14, 2025

Strategy review in light of the US tariffs - 3

…continuing from yesterday.

In my view, assimilating the impact of a sustained Indo-US trade standoff in a personal investment strategy is an extremely complicated task, for three reasons – (i) Indo-US relations are very deep and wide; (ii) Indo-US trade relations go much beyond import and export of goods and service; (iii) Indo-US trade relations are intricately intertwined with strategic, geopolitical and social relations.

Hence, the impact of a prolonged standoff in the trade relations may not be confined merely to a couple of thousand Indian exporters, having a material exposure to US markets. In my view, a noticeable impact could be felt at economic, political, geopolitical, and financial levels.

As of this morning, we do not know about the progress in back-channel negotiations. But visibly both the sides appear to have hardened their stance. India has outrightly rejected the reasons cited by the US administration for imposing penal tariffs, viz., purchase of crude oil from Russia, as unreasonable and completely untenable. The US President has extended the tariff moratorium for China (the largest buyer of Russian oil) by another 90 days. He is attending a meeting with the Russian president tomorrow. In my view, this is indicative of a different design behind these tariffs, rather than the stated one (also read Tariff Tantrums).

I hope that a sense will prevail and the Indo-US relations get normalized soon. Would be even better if this normalization of relations is part of a larger global resolution, in which the US and other major trade partners like China, Russia, Japan, and EU also come to a sustainable agreement. This could usher a new phase of global economic growth, in which India could be a meaningful partner.

However, if parochialism, hyper nationalism and/or vested business interests override the spirit of cooperation and globalization, and a broad-based resolution is denied, India faces economic and geopolitical challenges that would require material policy changes, including foreign, trade, fiscal and monetary policies.

If I were to imagine a worst-case scenario in Indo-US relations, I would draw a picture using the following colors and shapes.

· The US maintains penal tariffs, or even increases it further. The US businesses find it unviable to import from the Indian vendors. For generic goods and commodities, they shift to alternative sources (partially or fully) in the next 6-9 months. For specialized goods like specialty chemicals, auto components, pharmaceuticals, polished precious stone and jewelry, etc. the US importers may adopt a India+1 strategy. They may focus on developing alternative suppliers over the next 1-2 years and shift a part of their sourcing to such alternative vendors.

· The US administration brings services and remittances also within the ambit of tariff/taxation. More non-tariff restrictions are (VISA, qualifications, numbers, minimum pay etc.) also imposed on Indian workers and students. This might force more Indian companies to establish onshore entities in the US and increase local hiring. Alternatively, some Indian companies may choose to establish entities in the foreign jurisdictions with favorable terms of trade with the US.

· The US may restrict technology transfer to India by the US entities, hampering the growth of the manufacturing sector and R&D initiatives.

· The US may increase strategic engagement with the neighbors of India, especially the hostile neighbors like Pakistan and Bangladesh, to put geopolitical pressures and keep the borders insecure.

· The US may also incentivize/pressurize its close allies to review their relationships with India.

· The US administration may sanction certain Indian entities on the pretext of criminal activities, supporting war, unethical business practices etc., particularly impacting their global business and financing deals.

· The global economy also suffers, as the Political instability and unpredictable economic policies in the U.S., erodes confidence in the US economy and financial system. The foreign capital begins to move out of the US, causing sharp volatility and decline in the US asset prices, pressing the USD lower and bond yields higher, and a potential stagflationary condition.

· Several Indian MSME's face severe financial stress as they lose their US business. Some of them fail to survive as they are unable to develop alternative markets in time. Many downsize their operations. Several medium and large businesses establish overseas entities with a local employee base. Unemployment rises. There is some incremental stress on the financial system. Consumption suffers. Realty demand falls. Government faces fiscal pressures as growth declines and the deflationary trend strengthens.

If I close my eyes and visualize this picture, it frightens me to the core. If I try to assimilate even a part of this to my investment strategy, I would end up holding almost zero risk asset (equity). I would therefore refrain from any such exercise.

If you ask me “whether this worst-case scenario is possible?”, I would say “yes”. If you ask me what is the probability of this occurring, I would say “very low” but not “zero”.

I would like to believe that a broader global trade agreement may happen in the next 3-5 months, and Indo-US trade relations normalized to pre 2025 level, at least. In the meantime, I would, however, rationalize my portfolio to reduce the weightage of smallcap companies having over 20% revenue exposure to the US. In the mid and large cap space, I would only review the companies with over 20% revenue exposure to the US, provided they have significant debt on their books and are trading at a premium valuation (more than 20% premium to their long-term average valuation).

Wednesday, August 13, 2025

Strategy review in light of the US tariffs - 2

…continuing from yesterday.

To assess the impact of the latest changes in tariffs on the Indian exports to the US, on investment strategy and make suitable changes to minimize the adverse impact on investment portfolios, it is important to understand the dimensions of the Indo-US trade, its elasticity to tariffs, and sustainability of tariffs on various merchandise. Given the southward sloping trajectory of the Indo-US strategic relations since 2018, it may also be relevant to speculate a worst-case scenario; and find ways to assimilate that into investment strategy.

Dimensions of Indo-US trade

(Important note: The figures given in the following discussions have been taken from various sources, including the WTO, US trade department and India’s department of commerce. At various places these are reported either for calendar year or financial year. In some cases, these are provisional numbers. There could be some mismatch in terms of CIF and FoB reporting. Besides, I have rounded off numbers for convenience at many places. So please consider these data and pointers just for assessing a broader trend and not for doing any precise analysis. I would also not completely rule out any error in the figures. Readers may want to cross check where numbers appear incongruent.)

The US accounts for one fourth of India’s total exports

The US has been a key trading partner of India in the past three decades. Exports to the US account for more than one fourth of the India’s total

· In 2024, India exported goods worth US$87.3bn to the US; and it imported goods worth US$41.5bn from the US.

· India exported services worth US$41.6bn to the US, and imported services worth US$41.8bn from the US.

· India had an annual trade surplus with the US of appx US$45bn.

· Overall, in FY25, India exported goods and services worth US$821bn, and exported goods and services worth US$915.2bn. In this merchandise export were US$437.4bn, and merchandise imports were US$720.2bn

· The exports to the US constituted ~26% of India’s total exports. However, merchandise exports were slightly less at 20% of the total merchandise exports.

Pharma a key export for India, not so for the US

· Pharmaceuticals are a major part (US$11bn or ~12% of the total merchandise export to the US in FY24) of the Indian exports to the US.

· The US accounts for almost one third of India’s total pharmaceutical exports (FY24-US$31bn). Overall, the US imports pharmaceutical products worth US$180bn annually. Imports from India are thus ~6% of the total pharmaceutical imports. Ireland (28%) and Germany (21%) are major sources of pharmaceutical imports into the US.

· Pharmaceutical products are presently not subject to the reciprocal and penal tariffs announced by the US administration, effective from 07^th August and 27^th August 2025 respectively.

Precious metals, Engineering goods and Petroleum products are top exports

· In 2024, India exported US$9.2bn worth of precious stones & metals (~10% of total goods exported to the US), US$12.3bn worth of electrical machinery & equipment (~14%), US$11bn worth of petroleum products (~13%) and US$6.7bn worth of nuclear reactors, boiler, and machinery (~7.5%; exempt from the latest tariffs presently).

· Export of Textile, Apparels, etc. was appx US$5.2bn (6%).

· Telecom instruments/electrical parts worth US$2.2bn (2.5%) were exported.

Important to note that a lot of export from India to the US is done using imported raw material. A significant part of gems, precious metal, petroleum products, telecom equipment etc. is re-export of imported inputs after some value addition. Total value addition in these goods is much less as compared to textiles, carpets, pharmaceuticals etc. So, the net economic effect of slowdown in low value addition exports (almost 30% of the total exports to the US) may be much less.

The following is a summary of assessment study on India’s key exports.

High risk of loss in competitive edge

Electrical machinery & equipment — Highly price-sensitive, intense competition from China, Vietnam, Mexico; Indian exporters would lose market share quickly.

Apparel & textiles — Margins are thin, heavy competition from Bangladesh, Vietnam; high tariff would wipe out price competitiveness.

Articles of iron or steel — US can source from South Korea, Mexico, Turkey; India would see sharp volume declines.

Organic chemicals — Competitive global supply from China & Germany; would lose share unless specialized grades.

Medium risk — partial substitution possible

Machinery & mechanical appliances — Some niche segments less replaceable, but mainstream machinery will shift to other suppliers.

Optical/medical instruments — US has domestic production and EU/Japan suppliers; tariffs would hurt Indian share.

Low risk — possible tariff pass-through

Pharmaceuticals — US dependent on India for generics & APIs; short-term volumes unlikely to fall sharply, though margins may compress.

Precious stones/metals — Price elasticity lower; India could pass part of tariffs to US buyers due to skill-based competitive edge.

Mineral fuels — Mostly re-exports/refining trade; US can diversify but switching costs high for certain grades.

Items where US is significantly dependent on India

(High potential to pass on tariffs without major volume loss)

Generic pharmaceuticals & bulk drugs — India supplies 30–40% of US generic prescriptions.

Cut & polished diamonds — India processes ~90% of the world’s diamonds by volume.

Certain specialty chemicals & dyes — Limited alternative suppliers at scale.

Scenario analysis

For many Indian MSMEs — particularly in textiles, leather goods, handicrafts, small engineering components, jewelry, and carpets — the US is not just a large market; it’s often the largest, sometimes contributing 30–70% of annual revenues.

Until now, Indian exporters benefited from relatively low MFN tariffs, often 2–6% lower than competitors. The new tariff wipes out this edge, pushing landed prices above those from Vietnam, Bangladesh, or Mexico — in some cases by 10–15%.

For price-sensitive segments, that is an existential threat.

…to continue tomorrow

Tuesday, August 12, 2025

Strategy review in light of the US tariffs

The US administration has announced imposition of 50% additional tariffs (25% reciprocal and 25% penal), over and above the regular/MFN tariffs that were already in place, on merchandise imports from India. Certain items, like pharmaceuticals, that are part of separate trade negotiations, and services are presently not part of the new tariff rates and continue to be charged at the extant rates.

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.

Thursday, August 7, 2025

MPC saves one for the external shock

The Monetary Policy Committee (MPC) of the Reserve Bank of India concluded its three-day meeting on Wednesday. The committee voted unanimously to keep the policy repo rate unchanged at 5.50 per cent. The MPC also decided to continue with the neutral monetary policy stance.

The MPC noted the favorable domestic conditions like (i) inflation lower than estimates and closer to the lower bound of the policy tolerance limits; (ii) Robust growth, though below aspiration; (iii) transmission of the 100bps policy rate cuts continuing and its impact on the economy unfolding.

Urban consumer demand tepid, investment demand remains supported by govt capex

The MPC also noted that on the demand side: “Rural consumption remains resilient, while urban consumption revival, especially discretionary spending, is tepid.” However, “Fixed investment supported by buoyant government capex continues to support economic activity”.

Farm sector buoyant, services steady, industrial growth subdued

On the supply side, steady southwest monsoon is supporting kharif sowing, replenishing reservoir levels and boosting agriculture activity. Services activity also remains steady, though some high-frequency indicators recorded a modest expansion. Services PMI increased to an 11-month high of 60.5 in July 2025. Construction activity continues to exhibit resilience. However, growth in the industrial sector remained subdued and uneven across segments, pulled down by electricity and mining. While the manufacturing Purchasing Managers’ Index (PMI) remained elevated in Q1, the Index of Industrial Production (IIP) showed moderation.

Growth outlook strong, external challenges need to be watched closely

The MPC is of the view that the above normal southwest monsoon, lower inflation, rising capacity utilisation, and congenial financial conditions continue to support domestic economic activity.

The supportive monetary, regulatory and fiscal policies including robust government capital expenditure, should also boost demand. With sustained growth in construction and trade segments, the services sector is expected to remain buoyant in the coming months.

Prospects of external demand, however, remain uncertain amidst ongoing tariff announcements and trade negotiations. The headwinds emanating from prolonged geopolitical tensions, persisting global uncertainties, and volatility in global financial markets pose risks to the growth outlook.

The MPC maintained FY26 real GDP growth forecast at 6.5%.

Inflation to remain benign in FY26, to pick up in 1QFY27 on low base

The MPC that the inflation outlook for FY26 has become even more benign. Large favorable base effects combined with steady progress of the southwest monsoon, healthy kharif sowing, adequate reservoir levels and comfortable buffer stocks of foodgrains have contributed to this moderation.

CPI inflation, however, is likely to edge up above 4 per cent in Q4:2025-26 and beyond, as unfavorable base effects, and demand side factors from policy actions come into play. Barring any major negative shock to input prices, core inflation is likely to remain moderately above 4 per cent during the year. Weather-related shocks pose risks to inflation outlook. Considering all these factors, CPI inflation for FY26 is now projected at 3.1 per cent. CPI inflation for Q1FY27 is projected at 4.9 per cent with evenly balanced risks.

External sector resilient

India’s current account deficit (CAD) moderated to 0.6 per cent of GDP in FY25 from 0.7 per cent of GDP in FY24 due to robust services exports and strong remittances receipts despite higher merchandise trade deficit. Merchandise trade deficit further widened in Q1FY26. Robust services exports coupled with strong remittance receipts are expected to keep CAD within the sustainable level during the current financial year.

On the external financing side, gross foreign direct investment (FDI) to India remained strong during April-May 2025. However, net FDI moderated during this period due to higher outward FDI.

Foreign portfolio investment (FPI) inflows to EMEs have remained strong in May and June 2025. However, net FPI to India recorded outflows of US$ 0.8 billion in April-July 2025 due to outflows in the debt segment.

External commercial borrowings, on the other hand, witnessed higher net inflows compared to last year. Inflows under non-resident deposits too remained positive, albeit witnessing some moderation.

As on August 1, 2025, India’s foreign exchange reserves stood at US$ 688.9 billion, sufficient to cover more than 11 months of merchandise imports.

Overall, India’s external sector remains resilient.25 We remain confident of meeting our external financing requirements comfortably.

Liquidity remains comfortable, monetary transmission underway

System liquidity, as measured by the net position under the Liquidity Adjustment Facility (LAF), has been in surplus, on an average of ₹3.0 lakh crore per day since the last MPC, as compared to an average daily surplus of ₹1.6 lakh crore during the previous two months.

Going ahead, as the CRR cut announced in the last policy comes into effect in a staggered manner beginning September, it would further support liquidity conditions.

The comfortable liquidity in the banking system has reinforced transmission of the policy repo rate cuts to the money, bond and credit markets during the current easing cycle. In the credit market, the weighted average lending rate (WALR) of scheduled commercial banks declined by 71 basis points for fresh rupee loans (of which 55 bps is due to interest rate reduction) and 39 basis points for outstanding rupee loans from February 2025 to June 2025. On the deposit side, the weighted average domestic term deposit rate (WADTDR) on fresh deposits moderated by 87 bps during the same period. Moreover, the transmission to lending rates has been broad based across sectors.

Conclusion

In my view, the MPC sounded quite confident about the economic and monetary conditions. However, it repeatedly cited external geopolitical and trade related threat posing strong headwinds. I therefore read the latest pause on policy rates as a measure to preserve arsenal for a final push if the external environment worsens materially.

On Wednesday, the US president announced 25% extra (penal) tariffs on the imports from India, making the total tariffs to 50%, materially higher than the competitors. If a resolution to the latest implied sanctions on India, purportedly for importing crude oil from Russia, is not found, there could be significant pain in the economy in the near-term, till the policy, businesses and markets adjust to the new tariff regime.