Showing posts with label tariff. Show all posts
Showing posts with label tariff. Show all posts

Thursday, July 31, 2025

Powell refuses to toe the Trump line, India stay guarded

 The Federal Open Market Committee (FOMC) of the US Federal Reserve (Fed) maintained its policy rates at 4.25% to 4.5% range, by a majority vote. It was the first occasion since 1993 when two Fed governors voted against the majority decision. Fed governors, Michelle Bowman and Christopher Waller, wanted a 25bps rate cut at the meeting, concluded on Wednesday.

Thursday, July 24, 2025

Two random thoughts

Antimicrobial resistance becoming ominous

Antimicrobial resistance (AMR) is fast emerging as one of the most ominous health concerns at global level.

As per the World Health Organization (WHO), “Antimicrobials – including antibiotics, antivirals, antifungals, and antiparasitic – are medicines used to prevent and treat infectious diseases in humans, animals and plants. Antimicrobial Resistance (AMR) occurs when bacteria, viruses, fungi and parasites no longer respond to antimicrobial medicines. As a result of drug resistance, antibiotics and other antimicrobial medicines become ineffective and infections become difficult or impossible to treat, increasing the risk of disease spread, severe illness, disability and death.

AMR is a natural process that happens over time through genetic changes in pathogens. Its emergence and spread are accelerated by human activity, mainly the misuse and overuse of antimicrobials to treat, prevent or control infections in humans, animals and plants.

Antimicrobial medicines are the cornerstone of modern medicine. The emergence and spread of drug-resistant pathogens threaten our ability to treat common infections and to perform life-saving procedures including cancer chemotherapy and caesarean section, hip replacements, organ transplantation and other surgeries.

In addition, drug-resistant infections impact the health of animals and plants, reduce productivity in farms, and threaten food security.”

Please note that AMR is not a future threat. It is unfolding now—insidiously, incrementally, and globally.

Wolf may enter the barn unnoticed

There’s another kind of resistance building—this time in global financial markets.

President Trump is seeking to alter the global terms of trade through tariffs. In a massive exercise his administration is undertaking a review of the US’s trade terms with all countries (except perhaps Russia and North Korea), regardless of the size of their economy and quantum of trade with the US.

Initially, the global markets were reacting with a good deal of volatility to each tariff related announcement coming out of the White House. The Trump administration would take note of such volatility and take a step back. Of late, something has changed - Markets have "priced in" chaos. Markets are becoming immune to such announcements, assuming the proposed tariffs will not be implemented, as has been the case previously. Taking advantage of this market complacency, the US administration has already implemented some tariff proposals, including a 50% tariff on copper imports into the US. Trade deals have been reportedly signed with key trade partners like UK, China, Vietnam, Japan, Indonesia, and Philippines, materially altering the US’s terms of trade with these countries.

It's a classic “boy who cried wolf” dynamic playing out. Markets are becoming resistant to all threatening news, be it trade, geopolitics or climate.

The question to be examined is whether this resistance is materially different from AMR; or it is similar and would eventually weaken the resilience of markets, making them susceptible to sudden collapses?

As of this morning, I have no view on markets susceptibility to sudden collapses, but I do believe that mindless use of Antimicrobial in India (both through prescription and self-medication) is fast assuming epidemic proportions, and could have catastrophic consequences.

Tuesday, July 15, 2025

A method in madness

It is a common adage amongst the financial market participants that “When America sneezes, the rest of the world catches a cold”. The origin of this belief is the global market turbulence in the aftermath of 1929 Wall Street crash. In the past 100 years, whenever the US economy or markets have faced any serious problem, most of the global economies and markets have witnessed elevated volatility and erosion in asset prices. The prime reason for this correlation of the US economy and markets has been the disproportionately large size of the US economy and markets; dominance of the US dollar in global trade; and over-reliance of emerging markets on the US for investment, development assistance and humanitarian aid.

In the past couple of years, serious concerns have emerged about the sustainability of the US public debt and fiscal deficit. The overall GDP growth has been aligned to the average of the post global financial crisis (GFC) period. The efforts to accelerate growth have not yielded much results.

Since January 2025, when the incumbent President (Mr. Trump) assumed charge, things have been rather volatile. Mr. Trump has presented some radical ideas to tackle the economic problems distressing the US economy. These ideas include renegotiating terms of trade with all the trade partners; drastically reducing the budget for global development assistance and humanitarian aid programs; optimizing the size of US administration; and reducing the US commitment to strategic alliance (e.g., NATO); multilateral institutions including the UN and IMF etc.

The impact of these measures, whenever these are effectively implemented (or abandoned), may be felt in the US economy and markets, as well as the global economy and markets. Till then expect the markets to remain tentative and sideways.

Trump Plan

Notwithstanding the theatrics of Mr. Trump, a method in his madness is conspicuous. As I see it, the primary problem of the US is its unsustainable debt. At last count the US public debt was out US$36trn (appx 123% of its GDP), entailing over US$1trn in annual interest payments.

The conventional way to reduce this debt is to use a judicious mix of —

(i)    Curtailing government expenses;

(ii)   Increasing revenue;

(iii)  Inflating the economy to reduce the value of money

(iv)  Weakening the currency; and

(v)   Lowering the debt servicing cost through lower rates.

Mr. Trump is trying to achieve through tariffs (higher revenue and inflation); lower expenses (reducing the size of government, cutting foreign aid, lower clean energy subsidies, etc.); additional revenue (higher VISA fee, new taxes etc.); weaker USD; and coaxing the Fed to cut rates.

How much success he gets in his endeavor, we will know in the next 6-12 months. For now, I see nothing to worry about whatever is emanating from the US. In the next 12 months, the situation will either be the same or significantly better. I shall stay hopeful, though.

Thursday, July 10, 2025

A Tremendous Day in the White House – The Best Ever!

 Trump: Hey Susie, you’re looking absolutely fantastic, nobody does it better! How’s the morning going? Did my posts on Truth Social and that failing platform “X” – terrible name, by the way – absolutely ROCK the world last night? Total game-changers!

Wednesday, July 9, 2025

India’s US$736.3bn debt challenge: Can it weather a US tariff storm?

 India’s external debt hit US$736.3bn by March 2025, a 10% jump from last year, with a significant portion (over 41%) of the debt maturing soon. As the US threatens 500% tariffs on countries buying Russian oil, including India, investors need to evaluate: Can India afford a confrontation with the US, China and other major trade partners, and could it withstand a covert economic embargo? Here’s my take, may be naïve and ill informed, but nonetheless relevant.

India’s External Debt

According to the Reserve Bank of India (RBI) latest release, India’s external debt stood at US$736.3bn at the end of March 2025, with a debt-to-GDP ratio of 19.1%. Key highlights of the data are:

Long-Term Debt: US$601.9bn, up US$60.6bn from last year, with commercial borrowings and non-resident deposits driving growth. About 77% (US$568bn) of this debt is owed by non-government entities. The non-government debt is almost equally divided between financial institutions (US$271.3bn) and non-financial corporations (US$261.7bn).

Short-Term Debt: US$134.5bn, representing 18.3% of total debt and 20.1% of foreign exchange reserves.

Components: About one half of external liabilities (US$251bn) is loans and debt securities, 22% currency and deposits and 18% trade credit. The rest 10% includes IMF SDRs and intercompany lending by MNCs.

Maturity: 41.2% of the external debt (about US$305bn), is due to mature within the next 12 months.

Debt Sustainability: Foreign exchange reserves cover 92.8% of total debt, down from 97.4% a year ago, signaling a slight decline in buffer capacity.

Refinancing challenge

With over 40% of long-term debt maturing soon, India faces a refinancing challenge, particularly if global financial conditions tighten or trade disruptions escalate. India’s reliance on Russian oil, which accounts for 35-40% of its crude imports (2.08 million barrels per day in June 2025), has put it in the crosshairs of a proposed US Senate bill. The “Sanctioning Russia Act of 2025,” backed by Senator Lindsey Graham and reportedly supported by President Trump, proposes a 500% tariff on countries importing Russian energy to pressure Moscow over Ukraine. India, alongside China, buys 70% of Russia’s oil exports, making it a prime target.

Economic Impact: A 500% tariff on Indian exports to the US, India’s largest export market, could affect US$66bn (87% of India’s US exports), as per Citi Research estimates. This could disrupt key sectors like pharmaceuticals, IT, and textiles, potentially triggering inflation and job losses.

Oil Dependency: India imports 88% of its crude oil, with Russia offering competitive discounts. Switching to costlier suppliers like the US or Middle East could raise import costs significantly, straining India’s trade balance.

Can India Afford a Confrontation?

India’s economic fundamentals offer some resilience but also expose vulnerabilities.

Forex Reserves: At US$703bn (as of recent data), India’s reserves cover 92.8% of external debt, providing a cushion to manage maturing obligations. However, refinancing US$270.9bn in long-term debt within a year could pressure reserves, especially if US tariffs disrupt export revenues.

Trade Dynamics: The US accounts for a US$45.6bn trade deficit with India. A trade war could prompt reciprocal tariffs, but India’s 12% trade-weighted average tariff (vs. the US’s 2.2%) limits its leverage. Negotiations for a trade deal to cut tariffs on US$23bn of US imports are underway, signaling India’s preference for diplomacy over confrontation; notwithstanding some recent comments of senior ministers that suggest otherwise.

Oil Alternatives: India has diversified its oil imports, with the US supplying 6.3% (439,000 bpd in June 2025) and West Asia 35-40%. While switching from Russian oil is feasible, it would increase costs, potentially impacting fuel prices and inflation.

Can India Sustain Virtual Economic Sanctions?

Virtual economic sanctions, such as the proposed 500% tariffs, or Chinese embargo on export of critical components, chemicals, human resources etc., would act as a severe trade barrier.India’s ability to sustain them depends on several factors.

Energy Security: India’s strategic reserves (9-10 days of imports) and diversified suppliers (US, Nigeria, Middle East) provide short-term flexibility. However, replacing Russia’s 40% share at higher costs could strain refiners and consumers.

Economic Resilience: The RBI’s Financial Stability Report (July 2025) highlights strong banking sector metrics, with declining non-performing assets and robust capital buffers. This suggests India’s financial system could absorb some shocks, but prolonged trade disruptions could erode confidence.

Need for caution

India’s debt remains manageable for now, but over 41% debt maturity in 12 months calls for vigilance. Investors in Indian bonds or banking stocks should monitor refinancing risks.

A US tariff war could hit export-driven sectors like IT and pharmaceuticals hardest. India’s diplomatic efforts to secure a trade deal or tariff waiver will be critical. A successful negotiation could stabilize markets, while failure could spark volatility.

Conclusion

India’s US$736.3bn external debt and looming maturities pose challenges, but its reserves and diversified oil sources provide a buffer. A full-blown confrontation with the US seems unlikely, given India’s diplomatic push and economic stakes. However, sustaining virtual sanctions would strain India’s trade balance and energy costs, making de-escalation the smarter play.

The 41% of external debt (US$305bn) maturing within 12 months is significant, requiring substantial refinancing or reserve drawdowns. India’s US$703bn forex reserves provide coverage, but a US tariff war could reduce export revenues, complicating debt servicing.

Sustained 500% tariffs would disrupt exports, weaken the rupee, and increase debt servicing costs. The RBI’s strong banking sector provides some stability, but prolonged sanctions could erode investor confidence and slow growth.

India’s neutral geopolitical stance and trade deal negotiations (aiming to cut tariffs on US$23bn of US imports) indicate a strategy to avoid sanctions. A waiver or partial exemption is possible, given India’s strategic importance to the US.

Read with US$703bn may be just enough

Tuesday, July 8, 2025

US$703bn may be just enough

The Reserve Bank of India holds US$702.78bn in foreign exchange reserves. In the popular macroeconomic analysis, especially in the context of the equity market. this piece of data is often used as one of the points of comfort by analysts.

This data could be viewed from multiple standpoints. For example –

Is it adequate to pay for the necessary imports in the near term, assuming the worst-case scenario of no exports could be made and no remittances are received. Currently, India’s monthly imports are appx US$67bn. However, a material part of these imports is crude oil and bullion. A part of the crude oil and bullion is re-exported after refining/processing. I am unable to figure out the precise net import number for domestic usage, but it would be safe to assume that about three fourth of US$67bn, i.e., US$50bn is for domestic usage. Allowing another 20% for “avoidable in emergencies” category of imports, we have appx US$40bn/month import bill payment obligations. By this benchmark we have sufficient reserves to pay for appx 18months of imports. This is a very comfortable situation from conventional yardsticks.

However, we need to consider interest payment and debt repayment obligations also to assess the adequacy of the foreign exchange reserves.

As per the latest RBI release (see here), India’s total external liabilities stood at US$736.3bn as on 31st March 2025. 41.2% or appx US$305bn of this debt is due for repayment within the next 12 months. Assuming an average interest rate of 5%, another ~US$35bn would be needed for interest repayments. This implies about half of our foreign exchange reserves are needed for debt servicing in the next 12 month. This matrix raises some questions on the adequacy of our US$703bn reserves.

It also highlights the importance of remittances (appx US$135bn in FY25), foreign portfolio investment (FPI) flows (appx US$13.6bn in CY2024, including equities and bonds), and net foreign direct investment (US$3.5bn in FY25). An adverse movement in any of these flow matrices could materially affect the external stability. This brings in the factors like geopolitical stability, internal political & law and order situation, relative valuations of Indian equities and bonds, market stability and integrity, domestic investment climate, foreign investment policy framework etc. into the picture. Any policy mistake, strife in foreign relations, civic unrest, overvaluation, fraud, scam etc. could adversely impact the external stability.

The news headlines like - “China restricting export of critical components and chemicals to India, withdrawing expert manpower from India” that can adversely affect exports or increase the cost of imports for Indian manufacturers; the US considering to impose tax on the outward remittances”, ‘the US considering 500% duties on countries importing oil from Russia”, etc., - makes one cautious about the external stability of the country.

The experts need to analyze the latest RBI data on India’s external liabilities. In particular, it needs to be assessed whether India can withstand a trade war with the US; a covert geopolitical confrontation with China; frequent cases of market manipulation; policies and procedures that make India a less attractive destination for foreign investments; worsening law & order situation on parochial issue like language, religion, regionalism, etc.

…more on this tomorrow 

Tuesday, May 27, 2025

The story so far

The script in the US is playing mostly on the expected lines (see here and here).

Department of Government Efficiency (DOGE) – crash landing

Department of Government Efficiency (DOGE) is apparently on its way to crash land, with the pilot (Elon Musk) ejecting himself out shortly after taking off.

DOGE’s actions have faced multiple lawsuits, with critics arguing that Musk and his team have violated federal laws, union agreements, and civil service protections. A federal judge halted parts of USAID’s shutdown, and courts have restricted DOGE’s access to payment systems.

Despite Musk’s goal to cut $2 trillion from the federal budget, 2025 spending is slightly up from 2024, per Brookings Institution data.

Mandatory spending (e.g., Social Security, Medicare) limits achievable cuts. Over two million federal employees were offered buyout deals, with some agencies facing mass layoffs. However, some fired staff have been rehired, indicating implementation challenges.

Though DOGE has made a significant promise, the actual delivery has been materially lower, primarily due to legal, ethical, and practical challenges; mixed public support and limited measurable impact. With Musk virtually leaving the initiative, its future appears uncertain.

Fiscal deficit – continues to rise

The U.S. fiscal deficit is on an upward trajectory, driven by increased spending, rising interest costs, and insufficient revenue growth.

For the first seven months of fiscal year 2025 (through April 2025), the cumulative deficit was $194 billion higher than the same period in the previous year. Total outlays for this period were $4.2 trillion, up $340 billion from the previous year, driven by increases in Social Security ($70 billion), net interest ($65 billion), and Medicare ($41 billion)

The Congressional Budget Office (CBO) projects the federal budget deficit to be $1.9 trillion in fiscal year 2025, equivalent to 6.2% of GDP. By 2034, the deficit is expected to grow to $2.8 trillion (6.9% of GDP) if current policies remain unchanged.

Recent legislative proposals, such as the tax and spending bill passed by the House in May 2025, could add $3.3–$3.8 trillion to the federal debt over the next few years, further exacerbating the deficit. Federal debt held by the public is projected to rise from 100% of GDP in 2025 to 118% by 2035, surpassing the historical high of 106% set in 1946.

The US sovereign credit rating has been cut by Moody’s Aa1 from AAA earlier.

Tariff Tantrums – More pain than gains

The tariff war initiated by the Trump 2.0 administration in February 2025, has mostly been counterproductive so far.

New tariffs have generated a short-term revenue ($16 billion in April alone) but at a significant cost - A 6–8% GDP reduction in the long run as per The Penn Wharton Budget Model (PWBM); 2.3% higher consumer prices; losses to the US households; global trade contraction by 5%; U.S.-China trade nearly collapsing; retaliatory tariffs and supply chain disruptions exacerbating economic strain, particularly for U.S. consumers and export-heavy sectors.

The net effect is a significant economic burden on the U.S., with global ripple effects, though temporary truces (e.g., U.S.-China) and exemptions (e.g., USMCA) mitigate some damage.

Seemingly unconventional approach of the President may be turning the US strategic allies into adversaries. Frequent and unpredictable tariff tantrums of President Trump, have widened the trust deficit between traditional trade partners of the US (e.g., the EU, Britain and Japan), making the relationships purely transactional.

USD weaker, yield higher

The tariff war has imposed significant duties (e.g., 20–145% on Chinese imports, 25% on steel, aluminum, and autos from Canada and Mexico). These tariffs raise the cost of imported goods, increasing inflationary pressures. For example, the two-year breakeven inflation rate rose from 2.54% at the end of 2024 to 3.36% by April 8, 2025, reflecting market expectations of higher short-term inflation.

Rising inflationary expectations, fiscal debt and debt sustainability concerns (rating downgrade) have prompted the bond investors to demand higher yields. As Minneapolis Fed President Neel Kashkari noted, rising yields and a falling U.S. dollar suggest investors may be viewing the U.S. as less attractive due to trade war escalation and fiscal concerns, reducing demand for Treasuries as a safe-haven asset.

The US Fed is also sounding more hawkish in its recent statements, impacting the traders’ and investors’ sentiments.

The U.S. dollar (USD) has also been weakening in 2025, with the Dollar Index (DXY) dropping from 108.2 in late December 2024 to around 100, a decline of approximately 7%. This weakening of the USD is driven by multiple interconnected factors, e.g., the rising U.S. fiscal deficit, the tariff war, rising U.S. Treasury bond yields, and failure of the Department of Government Efficiency (DOGE) to implement material spending cuts.

I still believe that the conventional wisdom will prevail, tempers will cool down and President Trump will eventually return to the path of reconciliation and cooperation. Nonetheless, it is still uncertain how much damage would have already been caused by then.

Also read

“MAGA” – Keeping it simple

The master failing the first test

View from the Mars

View from the Mars - 2

Tariff Tantrums

“Trade” over “War”

Wednesday, April 9, 2025

Tariff Tantrums – Where do we stand?

The global markets are shaken by the trade war initiated by the US by announcing arbitrary unilateral tariffs on all of its trade partners. Some large trade partners of the US, like China and EU, have reportedly threatened to join the war with full vigor, making the global market extremely jittery.

Tuesday, March 11, 2025

The master failing the first test

Ever since the self-proclaimed master in the “art of deal making” re-entered the White House, January 2025, after a hiatus of four years, the atmosphere has been filled with greater uncertainties. Each time, the great negotiator sits behind his newly acquired table in the Oval office, or holds a mike in the James S. Brady Press Briefing Room, he adds little more to these uncertainties.

The President of the United States (POTUS) is announcing a material hike in trade tariffs, pausing his orders, deferring implementation of his orders, and reinstating his orders as if he is ordering his evening snacks and not able to decide between coffee and soup. His administration, including the Alpha male, VPOTUS, and the Smartest man in-charge of DOGE, for some strange reasons, is not briefing the POTUS that changing tariff may, inter alia, require—

a)    some preparation on the part of trade and custom authorities to adjust their systems, documentation, and software;

b)    a lot of effort for the traders – who need to renegotiate the previous contracts and adjust the pricing accordingly;

c)     significant adjustments by the downstream value chain, including the ultimate consumer who might have to bear the impact of tariff hikes;

d)    monetary authorities to assess the impact of the changes in tariffs on the overall price curve and corresponding monetary policy response, if any required;

e)     counterparties to decide on the strategy to deal with the revised tariff. The response may be aggression (reciprocal hike in tariffs) requiring further adjustments by the importers, and downstream value chain; and

f)      financial markets to assess the impact on businesses, currencies and rates, and accordingly adjust the discounting factors, option pricing, etc.

The uncertainties created by frequent policy flip-flops of the POTUS, is also impacting the supply chains globally, as both the buyers and sellers are in a state of flux. If it continues like this, soon we could see a repeat of Covid like supply chain disruptions including logjams at ports, shortages of containers.

Sensing that the POTUS may be bluffing, the Chinese authorities have already placed a 2x blind bet by announcing that China (biggest trade partner of the US) is ready for any kind of war. Responding to the 10% extra tariff imposed by the US, China’s foreign ministry spokesperson Lin Jian said: “Exerting extreme pressure on China is the wrong target and the wrong calculation … If the US has other intentions and insists on a tariff war, trade war or any other war, China will fight to the end. We advise the US to put away its bullying face and return to the right track of dialogue and cooperation as soon as possible.” (see here)

Canada and the EU have also responded aggressively to the Trump Tariff threats.

“Canada’s initial retaliatory tariffs against the U.S. will remain in place despite President Donald Trump postponing 25% tariffs on many imports from Canada for a month, two senior Canadian government officials said. (see here)”

“We will not let ourselves be bullied, not with tariffs nor with threats about our legislation,” said Bernd Lange, a usually mild-mannered German Social Democrat who chairs the European Parliament’s international trade committee. (see here)

We would soon know whether the great negotiator is actually bluffing or is serious about his MAGA pledge; and is willing to make the US businesses and consumers (and the US economy) suffer medium-term pain, as the local manufacturing base is rebuilt (without the benefit of cheap and abundant immigrant labor) over the course of next 5-7 years.

Besides the tariffs, the POTUS has also threatened to withdraw from the multilateral institutional frameworks like NATO, the UN and IMF etc. The recent developments in Ukraine and Palestine indicate that NATO is no longer a potent deterrent to war, and the UN’s credibility is eroding at the fastest pace since the attack on Iraq on a false pretense of WMD. The withdrawal of the US (the largest fund contributor to these institutions) will only precipitate the inevitable.

…more on trade war tomorrow

Wednesday, February 5, 2025

3D view of market – Deleveraging, Demographics and Deflation

“There are events in the womb of time, which shall be delivered in time”. (Othello, William Shakespeare)

Beginning of the current year, I commented that “the trend seen in the past few months is indicating that the conditions might change materially in the next 12-24 months. The macro trends may become ambivalent and unpredictable. Investors may need to make choices; and the return they would earn on their investment portfolios would largely depend on the choices they would make. Making right choices, in my view, would be the central investment challenge for the year 2025.”

Barely one month into the year and it appears that earth already witnessed many seasons. The conditions are becoming more uncertain with each passing day. The 47th President of the United States (P47), appears in a tremendous hurry to deliver on his promise to Make America Great Again (MAGA). He is using all his negotiating skills to secure good deals for his country. How much success will he achieve with his aggressive approach, we would only know with passage of time. Nonetheless, with his initial actions he has created a fair degree of uncertainty in the minds of his political opponents, trade partners, strategic partners, competitors and markets.

While I continue to maintain that investors would be better off avoiding a macro trade and focusing on individual business stories in the next 12-24 months, the three macro trends worth including in the matrix for identifying and evaluating individual business stories are Deleveraging, Demographics and Deflation.


Deleveraging: The US Fed has contracted its balance sheet by US$2.1trn since the beginning of its monetary tightening (QT) program in April 2022. The total assets held by the US Fed are now lowest since May 2020. It would need to unwind another US$2.7trn to completely undo the Covid related monetary expansion. Besides the US Fed, most other central bankers have shown a tendency to tighten the money supply by reducing their asset holdings. The Bank of England balance sheet is following the same trajectory as the US Fed. BoJ has not expanded its balance sheet in the past couple of years and cut the size of its asset holdings in recent months. Even RBI’s balance sheet has contracted in the past few months.




If we take the plan of P47 at par value, we are staring at one of the biggest fiscal corrections in modern history. Most other major developed and developing countries are also progressing on the path of sustainable fiscal corrections.

 


This macro deleveraging at the global level might reflect in the corporate and household balance sheets sooner than later. But for a major natural or manmade disaster, we should be factoring in sustainable governments, lower rates and adequate household savings in our investment strategies.

Demographics: One of the most critical trends in a large part of the developed world is deteriorating demographics. Most European and LatAm countries, the US, Canada, Japan, China, South Korea, Thailand, etc. have their total fertility rates fallen below the replacement ratio (implying their population is now on a declining path). The proportion of the working age population in these countries is decreasing fast. The population in China has already peaked and the population in India is expected to peak much ahead of the previous estimates of 2050.

This demographic trend appears structural and irreversible. With deeper and wider integration of technological advancement in social and personal life, the need & space for human interaction is on the decline. Financial and professional constraints are adversely impacting the capability and willingness to commit to personal relationships. Stressed and hectic lifestyles are adversely impacting the fertility of humans. There is nothing to suggest that these trends could change in the foreseeable future.

Obviously, the demographic trends will reflect on the aggregate demand as well as the demand mix.

Deflation: The mix of deleveraging, ageing demographics and superior productivity gains through technological advancements may lead to resumption of the pre-Covid deflationary trend. The supply lines disrupted due to Covid related restrictions and geopolitical developments post 2021 have mostly been restored. Save for a totally unexpected development, the current trend appears that a workable global trade balance may be achieved within the next 12-24 months.

With almost all major global market forces (the US, China, Germany, Japan, South Korea, France and the UK account for ~40% of the global trade) focused on repairing and strengthening their domestic economies, it is more likely a mutually beneficial global trade framework will emerge after the initial aggression of the P47 brings all trade partners to the negotiating table. This framework would, among other things, will certainly dampen the inflationary expectations.

Thursday, January 23, 2025

New chapter in Indo-US relations

Mr. Donald Trump has chosen to take some time before speaking with his Indian counterpart Mr. Narendra Modi. Trump has chosen to call the Chinese premier Xi Jinping, even before his inauguration. Prime Minister Modi has apparently sent a written congratulatory message to Trump, instead of calling him. This small pause in the top-level communication has triggered a debate about the shape of Indo-US relations in the near future.

In my view, before drawing any conclusion from Trump’s pause, and writing obituaries of the Indo-US strategic partnership, we must study the evolution of Indo-US relationships. This relationship has evolved over the past 75 years. It is primarily based on mutual need and shared democratic values, and goes much beyond the personal equation of individual leaders.

Prologue

The foundation of Indo-US was laid during the 1949 visit of Prime Minister Nehru’s visit to the US and meeting with President Henry Truman. Nehru was welcomed by everyone he met during his multi week stay in the US. However, Not much was achieved in diplomatic and economic terms.

Ten years later, President Eisenhower visited India for five days, in 1959. He addressed the Parliament and expressed “deep satisfaction at the friendly and cordial relations existing between their two countries, and their firm belief that their common ideals and objectives and their quest for peace will ensure the maintenance and development of the strong ties of friendship between the two countries.” Again, the Indo-US relations did not move beyond exchanging pleasantries.

The first chapter

India co-founded the Non-Aligned Movement in 1961, taking a neutral stand in the cold-war between the USSR and the US. 1962 was an important year in the evolution of Indo-US relationship. This year, the U.S. Agency for International Development signed the Kanpur Indo-American Program to help in the establishment of the first IIT. The program included deployment of American faculty members to develop academic programs and research laboratories at the new university over the next decade. Later, President Kennedy supported India in the Indo-China conflict, recognizing McMahon Line and also providing air assistance and arms. Next year, in 1963 Norman Borlaug, a renowned US Agronomist, visited India and laid the foundation of the Green Revolution. India also benefited from wheat imports from the US under PL-480 “food for peace” program during the 1960s.

1965 saw a material deterioration in the US-Indo relationship as Washington sided with Islamabad in the second major Indo-Pak conflict. The situation worsened further in 1970’s when President Nixon sided with Islamabad during the 1971 Indo-Pak war. This was the time when India signed a 20 year “Treaty of Friendship and Cooperation” with the USSR. The relationship deteriorated further in 1974 when India became the first non UNSC permanent member to conduct a nuclear test.

A reproachment effort started in 1978, after Mrs. Gandhi was defeated in the 1977 general elections. President Carter visited India and Prime Minister Desai reciprocated with a 6-day visit to Washington. However, with the US enacting the Nuclear Nonproliferation Act in 1978, the process was derailed.

Prime Minister Gandhi made another attempt to revive Indo-US relations during her visit to Washington in 1982. She and President Regan largely agreed to increase cooperation and resolve a dispute over nuclear power. Vice president Bush (Sr.) led a high level visit to New Delhi to explore areas of cooperation. However, 1984 Bhopal Gas tragedy again derailed the process.

Post the end of the cold war (1989), for a few years, India and the US had a good working relationship. Prime Minister Rao unleashed substantial economic reforms and expanded economic ties with the US. However, things turned for the worse in the summer of 1998, when prime Minister Vajpayee surprised the US intelligence agencies with a nuclear test and announced India as a full-fledged nuclear power. President Clinton recalled his ambassador to India and imposed severe economic sanctions on India.

A year later in 1999, President Clinton called Pakistan Prime Minister Sharif and nudged him to end the Kargil conflict immediately. In the year 2000, Clinton became the first US President to Visit India since 1978. The visit marked the first step toward forming a durable Indo-US strategic relationship. Clinton agreed to not make signing of CTBT a precondition for Indo-US economic cooperation. The Indo-U.S. Science and Technology Forum was established during this trip, which also marked the beginning of the end of the Cold-War strategic US-Pak alliance. President Bush lifted all US sanctions on India in 2001.

Second chapter

In 2005 a new chapter in the Indo-US relations started. Both countries signed the New Framework for the U.S.-India Defense Relationship, which set priorities for defense cooperation in maritime security, humanitarian assistance/disaster relief, and counterterrorism. They also inked the Civil Nuclear Cooperation Initiative, a framework that lifts a three-decade U.S. moratorium on nuclear energy trade with India. Under the agreement, India agrees to separate its civil and military nuclear facilities and place all its civil resources under International Atomic Energy Agency (IAEA) safeguards. In exchange, the United States agrees to work toward full civil nuclear cooperation with India. (The US Congress and Indian Parliament ratified this deal in 2008.) In October 2005, both countries jointly conducted the largest naval exercise to date, followed by major air and land exercises.

In 2006, President Bush visited India and finalized, with Prime Minister Singh, Singh finalized the framework of the civil nuclear deal and boosted security and economic ties. The nuclear deal made India the only country outside of the Nonproliferation Treaty that has nuclear capabilities and is allowed to participate in nuclear commerce.

In 2007, an 18year old ban on import of Indian mangoes to the US was lifted, marking the beginning of an effort to double the Indo-US trade within three years. Bilateral trade in goods and services totaled around $45 billion in 2006 and rose to more than $70 billion in 2010.

In 2008, Chandrayaan-1 became the first Indian spacecraft to land on the moon. It carried two scientific instruments designed by NASA scientists, marking a significant progress in Indo-US space cooperation (an agreement that existed since 1963).

Third chapter

In 2010, India and the US convened the first U.S.-India Strategic Dialogue. Secretary Clinton lauds India as “an indispensable partner” and President Obama claimed the relationship “will be a defining partnership in the twenty-first century.” President Obama visited India in November. He addressed the Parliament and backed the country’s long-held bid for a permanent seat on the United Nations Security Council. He announced $14.9 billion in trade deals.

In 2012, Secretary of Defense Leon Panetta visited India to bolster military ties. Next year (2013), Prime Minister Singh visited Washington to meet President Obama for the third time in four years to discuss important issues such as security, trade, immigration reform, and the civilian nuclear deal.

In 2014, President Obama invited Prime Minister Modi to the White House. President Obama made his second visit to India in 2015 as Chief Guest at Republic Day celebrations. Ten-year U.S.-India Defense Framework Agreement was renewed for another ten years.

In 2016, the US elevated India to a “major defense partner”, a status no other country holds. This enabled India to enjoy some of the benefits of being a U.S. treaty ally, such as access to defense technology.

In 2017, Prime Minister Modi visited the US to meet President Trump, who raised sharp disagreements with India over trade, climate change, and H-1B visas. Regardless, their joint statement emphasizes strengthening their defense partnership, cooperating on counterterrorism efforts, and boosting economic ties.

In 2018, during a “two-plus-two” dialogue in New Delhi an the Communications Compatibility and Security Agreement (COMCASA) was signed allowing India access to advanced communication technology used in U.S. defense equipment and allows real-time information sharing between the two countries’ militaries.

Fourth chapter

In 2018, the Indo-US relations took a turn towards the south. President Trump terminated India’s preferential trade status, part of a 50yr old program that allows products from developing countries to enter the U.S. market duty free. Trump claimed India has not provided “equitable and reasonable access” to its own market. In retaliation, India slapped tariffs on twenty-eight U.S. products.

In 2020, President Trump made his first official visit to India. India agreed to purchase US$3bn worth of military equipment. However, the two countries could not resolve pending trade issues. Opinions remained divided over agricultural products, tariffs, and other areas.

In 2020 the first in-person meeting of Quad was held, and President Biden hosted Prime Minister Modi for the first time.

In 2023, the Initiative on Critical and Emerging Technologies (iCET), an agreement that aims to expand bilateral technology and defense cooperation is announced. As part of the deal, U.S. officials seek to reduce India's purchase of Russian arms.

Fifth Chapter

I guess, President Trump might look to begin a fresh chapter in the Indo-US relations. Early indicators are pointing that he may look to base the mutual relationship on equality. So far, the US has played the role of a dominant partner helping India to grow faster. President Trump may now seek to rebase the relationship seeking full reciprocity from India on key economic, trade and technology issues.

The Indo-US relationship henceforth may become purely transactional, shedding the pretense of strategic partnership. The Trump 2.0 administration would negotiate hard on tariff concessions; preference in defense and energy procurement; resolution of contentious issues like agriculture tariffs. The US negotiators might use the façade of freedom of speech & religion, persecution of minorities etc. as key negotiating tools.

It will obviously be a tough & volatile transition; especially when the domestic economy is passing through a challenging downcycle. During the previous transitory phases (1970s and Late 1990s), India managed well. Hope this time will not be different. Till then keeping fingers crossed, seat belt tightened, and store filled with emergency supplies.