Do it yourself: tariff

Showing posts with label tariff. 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

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, 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.

The majority decision of the Fed to not cut rates is apparently against the wishes and open demand for a rather drastic cut in the Fed policy rates by the US administration, especially President Trump.

Strong April-June quarter GDP data and July private payroll data perhaps weighed on the Fed decision. The Commerce Department’s advance gross domestic product (GDP) report on Wednesday showed growth of 3.0% for the April to June period, above the 2.5% growth expected. US GDP shrank by 0.5% in the January-March 2025 quarter. U.S. private payrolls also increased more than expected July, rising by 104,000 jobs in July 2025 after a revised 23,000 decline in June.

Powell stays defiant

The Fed chairman Jerome Powell stayed defiant, not showing any sign of conforming to the political wishes and sticking to his mandate of keeping the prices under control and making employment conditions strong. In the post meeting conference Powell emphasized that there is no place for the central bank to consider government financing needs when setting interest rate policy. He said, “we don't consider the fiscal needs of the federal government. No advanced economy central bank does that, and it wouldn't be good”. Further adding that “it wouldn't be good for the Fed to do so as it would compromise its credibility”.

Important to note that the Fed has faced aggressive pressure from President Trump to cut rates. Trump has been claiming that said a large move down in rates (300bps) is justified by several factors, including stable inflation and improving fiscal conditions. At $1.1 trillion in interest rate payments last year, the cost of managing government debt has more than doubled since 2020 and that’s in some part driven by the high rates the Fed has in place to cool inflation levels.

Trade policy impact, a key variable

While the market participants agreed that it is important for the central bank to maintain its autonomy and make policy decisions on the basis of available and expected data, in order to effectively keep the prices under check.

Though Fed officials said that they “continuing to weigh data to see how big changes in government import taxes are affecting the economy, as financial markets continue to eye a possible September easing in short-term borrowing costs”, Chairman Powell suggested that he would like to wait for more data on impact of trade policy on prices, before taking any decision on rate cuts. Powell said the central bank has “made no decisions” about a potential policy change in September. He added, “Higher tariffs have begun to show through more clearly to prices of some goods, but their overall effects on economic activity and inflation remain to be seen.”

The US administration is pursuing a volatile and aggressive trade policy, in order to reset the terms of trade with its trade partners. It is still far from clear how the situation will finally appear once all trade related issues are settled. While the President has claimed that many trade deals, including with the EU, have been signed and the US is already on course to collect more than US$300bn in additional import duties this fiscal, reports suggest that a fresh round of trade negotiations in Sweden between the U.S. and China failed to result in a major breakthrough following two days of talks. Vietnam has also denied signing any trade deal with the US, as claimed by the president.

On Wednesday, Trump also announced that the United States will impose a 25% tariff plus penalties on India starting August 1, citing the country’s purchases of Russian military equipment and energy.

The impact of the increased tariffs on the domestic economy and inflation would be only known in a few months.

India’s reaction to tariff

The Ministry of Commerce has issued a guarded statement in response to Trump's announcement of tariffs and penalties on Indian exports to the US. The press release issued last night read as follows:

“The Government has taken note of a statement by the US President on bilateral trade. The Government is studying its implications.

India and the US have been engaged in negotiations on concluding a fair, balanced and mutually beneficial bilateral trade agreement over the last few months. We remain committed to that objective

The Government attaches the utmost importance to protecting and promoting the welfare of our farmers, entrepreneurs, and MSMEs.

The Government will take all steps necessary to secure our national interest, as has been the case with other trade agreements including the latest Comprehensive Economic and Trade Agreement with the UK.”

Though the markets may react today to Trump's tariff announcement, it is too early to assess the impact. It is still not clear, whether key Indian exports like Pharma, that were part of a separate trade negotiation are also part of this 25% tariff announcement. The “penalty” is also a vague term at this point in time. A team of the US trade negotiators is scheduled to arrive in India later this month. It is possible that the tariffs are stayed till the negotiations are complete, or be reversed to a more favorable rate, just like it has been done in the case of South Korea yesterday.

This tariff announcement is at best a temporary measure, pending the finalization of a comprehensive trade deal likely to be finalized later this year.

I would therefore like to have more clarity before reacting to the tariffs. This includes not jumping to buy if the market falls sharply today.

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!

Susie Wiles: Sir, you’re the greatest President in history, nobody even comes close! The entire planet is glued to your accounts. Your posts are sending shockwaves across the universe – markets trembling, governments in a frenzy. We’re doing phenomenal, the best any administration has EVER done!

Trump: Fantastic, just fantastic. I knew it! Show me the posts we’re dropping today – we’re gonna dominate!

Susie Wiles: Right here, Sir, the absolute best ammo for today’s battle!

Trump: Susie, you’re a genius, just brilliant. I love you, you’re tremendous. Fire off a post every 10 minutes, keep ‘em shook! Oh, and send Little Marco in, pronto.

Marco Rubio: Good morning, President. How’s the greatest leader in the world doing today?

Trump: Marco, we’re doing unbelievably great. I’ve made the world so peaceful, nobody’s done it better. What’s the latest?

Marco Rubio: Sir, Putin’s being stubborn, refusing to back down on the war. We need to hit him hard.

Trump: Vlad’s a tough guy, plays it close, but I’m tougher! Let’s slap a massive 500% tariff on any country touching his dirty oil. That’ll teach ‘em! What else?

Marco Rubio: The BRICS clowns are making noise in Rio, talking about ditching the dollar. It’s a disgrace!

Trump: Disgusting! Sleepy Joe let this garbage BRICS nonsense grow – total loser! Modi’s a great guy, loves me, always listens. I’ll tell him to dump BRICS – without the “I,” it’s nothing! Tell Ice Maiden to draft an order: 10% extra tariff on all BRICS countries. Done! Anything else?

Marco Rubio: That’s more than enough winning for today, Sir. Tremendous!

Trump: Absolutely, MAGA is unstoppable! Send Scott in, quick!

Scott Bessent: Good morning, President. I’ve got incredible news – the best! MAGA’s working like never before. Inflation’s down, lower than any president in history. Jobs are rocketing through the roof, corporations are raking tons of profits, and the people LOVE us!

Trump: Scott, that’s spectacular, nobody does it better than me! I’m posting this RIGHT NOW. Posts on truth Social – “I brought down costs more than any President in recorded history. The Crooked Democrats are using the opposite narrative, even though they know it is a total LIE. Remember this when you hear their phony soundbites. MAGA!!!” Takes a screen shot of the post and posts it on “X”.)

Why hasn’t that clown Powell cut rates by at least 2%? He’s a disaster!

Scott Bessent: Absolutely, Sir, Powell’s clueless, ignoring your genius advice!

Trump: We’re firing him ASAP, believe me. Anything else?

Scott Bessent: Just some MAGA chores to keep the momentum, Sir!

Trump: Tremendous work, Scott. Send Pete in, let’s keep winning!

Pete Hegseth: Good morning, President. How’s the greatest Commander-in-Chief doing today?

Trump: Pete, I’m fantastic, nobody’s better! Did you talk to Bibi? He’s a great friend, just terrific.

Pete Hegseth: Yes, Sir. Bibi says he’s not stopping until Gaza’s becomes the seventh district of Israel.

Trump: Bibi’s a winner, always delivers! I love him. Tell him to fake a ceasefire – just until I lock in that Nobel Peace Prize, it’s mine! Any ideas?

Pete Hegseth: Sir, he won’t listen to me, but invite him for a big Independence Day dinner – ask for the ceasefire as a gift!

Trump: Pete, you’re brilliant, just brilliant. Tell Ice Maiden to send Bibi a YUGE invite. Now get Howard in here!

Howard Lutnick: Good morning, President. How’s the greatest dealmaker in history today?

Trump: Howard, I’m phenomenal, nobody negotiates like me! What’s the deal with trade? Have we crushed all 195 countries yet?

Howard Lutnick: Sir, we’ve got ‘em all shaking! Threatened tariffs at 5%, 10%, 20%, 26%, 45%, 60%, 100%, 200%, 500% – they’re terrified!

Trump: Perfect! Is China paying up like I told Jinping?

Howard Lutnick: Sir, seems like they’re cheating, rerouting shipments through other Asian countries.

Trump: Jinping’s sneaky, but I’m smarter! List every country helping China and hit ‘em with a 45% tariff – BOOM! Anything else?

Howard Lutnick: Powell’s whining that tariffs are inflationary, says he can’t cut rates.

Trump: Powell’s a low-energy fool, but he might have a point. Pause new tariffs until end of July – by then, everyone will bow to my deals, and the Nobel folks will see my genius. That’s enough winning for today. Time for a quick nap – I’ve earned it!

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 31^st 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.

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.

The prices of most risky assets and commodities have corrected sharply due to fear of widespread economic repercussions resulting in a global recession or even a depression like condition. The benchmark indices in most developed countries have corrected 8% to 18% in the past one month. Commodities, especially metals and energy, have also seen 7%-15% cut.

In my view, it may be a little early to assess the short-term impact of the latest events. Things are evolving fast and chances are that better sense would prevail and leaderships of the US and its trade partners would be able to prevent the current stalemate from becoming a game of ego between them; and arrive at a mutually agreed solution. Millions of research reports and several hours of media commentaries, analyzing the short-term impact of the latest tariff war, have already happened. I am in no position to add anything more meaningful.

However, if the situation does deteriorate and more people begin to think like Prime Ministers of Singapore (watch here) and the UK (read here), the global ‘reset’, we have been talking about since the global financial crisis (GFC: 2008-10), may take a tangible shape much sooner than presently anticipated. It is critical to make an assessment where would India stand in the new global order, if it were to take shape in the decade or so.

The impact of the GFC on financial markets was mitigated in a couple of years by collective efforts of the governments and central bankers. However, the social, geo political and economic impacts of the crisis largely remain unmitigated.

The "Reset" button pressed by the crisis has resulted in widening of socio-economic divide across the world. The geo political tensions have intensified materially. The rise in protectionism has adversely impacted global trade. The rising unemployment in Europe and most commodity dependent economies in Asia, Africa and Latin America, declining growth in China, substantial cut in developmental aid to least developed nations due to fiscal pressures, has caused widespread human suffering for over a decade now.

The onslaught of novel coronavirus (COVID-19) and Russian invasion of Ukraine, has accelerated the "Reset" process. I have written this before, but it would be in order to reiterate a brief account of the changes in world order that have taken place since the advent of the 20th century.

In 1917, the Russian revolution successfully dismantled the Tsarist autocracy and laid the foundation of the USSR. In the following decades, many smaller independent European states became subservient to a mighty Russian socialist army, and together formed one pole in the emerging bi-polar world, forever shrouded by the specter of cold war.

In the same year, the USA decided to join the War as an associate of the Allies - a development that tilted the scale in favor of the Allies, bringing the War to an end in 1918. In the following decades, the USA emerged as a formidable military and economic power, and led the democratic allies to become the second pole in the emerging bi-polar world.

The imperialist global order that existed in the preceding centuries began to dismantle. Many colonies of the European empires gained freedom. The British Empire that was built in three centuries and covered almost one fourth of the world population and area before the War, was completely dismantled in the following three decades. In these three decades (1918-1950), a new world order acquired a concrete shape. For the first time in modern history, the world adopted a rule-based order, characterized by multilateral agreements and institutions like the UN, NATO, WARSAW Pact, GATT, NAM, Bretton Woods, World Bank, energy cartel (OPEC), et. al. Mao, Israel, and the Cold War were key interludes in the main play. This world order lasted for about four decades.

The German Wall fell and the USSR disintegrated in early 1990s. This unleashed a new wave of globalization in a world dominated by just one superpower – the USA. Global Trade (WTO), Internet, dematerialization of assets, Europe integration into a single market, China's entry into mainstream global trade (through WTO), free flow of capital, G-20, BRICS, numerous FTAs, global war on Islamic fundamentalism, energy security, climate control and global financial crisis, dominated this phase.

Cracks started to emerge in the global order after GFC. The global economic behemoth China started to express its global ambitions in terms of domination over trade, technology and territories. Russia, which had become a dominant player in the global energy market, also expressed its ambitions. Both these countries now led by unchallenged, ambitious, and strong leaders were openly challenging the US hegemony; and looking for a rightful place for themselves in the global order.

In the past five years, the outbreak of a global pandemic and Russian invasion of Ukraine has accelerated the process of a reset in the global order. As things stand today, we could have a concrete shape of the new order emerging in the next 5-10 years. I personally do not believe that the emerging world order will be based on isolationism, parochialism, localization of trade and closed borders. Though smaller trade blocs, more regional blocs like the European Union, neutral currencies, and redrawn global maps may be some of the key features of such an order.

A more relevant point is where does India stand in this critical transition? I would share my thoughts on this next week.