Do it yourself: trade

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Wednesday, October 29, 2025

Beyond the Debt Conspiracy: What we need to be bothering about

Several readers have commented on my yesterday’s post (“USD, Gold, Crypto and a mountain of $38trn debt”). Some agree that the “debt manipulation” theory was far-fetched, others argued that I was underplaying the seriousness of America’s fiscal overhang. Both reactions are valid. My intent, however, was not to trivialize the US debt issue, but to put it in its proper context — and to focus attention on the much larger transitions now underway in the global financial order.

I would like to elaborate to convey my point in the right perspective.

The Debt Problem Is Real — but Not New

The US federal debt now stands around $38 trillion, or roughly 120% of GDP. That sounds alarming, but the ratio has hovered near that level for over a decade. The composition, though, has changed dramatically.

After the dotcom bust, debt piled up in corporate and household balance sheets. After Lehman, it migrated to banks. Post-Covid, it has firmly shifted to the sovereign. In essence, the debt hasn’t disappeared — it has just changed owners.

This doesn’t mean the US is immune to a confidence crisis. But it does mean that debt is a chronic structural feature of modern fiat economies — not an engineered plot to reset the system.

1933, 1971 — and the temptation of simplistic parallels

Many commentators love to invoke 1933 or 1971 to suggest a looming “USD reset.”

But both those episodes happened in very different institutional and political contexts — gold standard rigidity, post-war reconstruction, and early Cold War dynamics.

Today’s world operates on a networked, digitalized, and politically fractured global economy. If history rhymes, it does so in free verse, not repetition.

The better historical analogy might not be 1933 or 1971, but the slow disintegration of older orders — Roman, British, Ottoman or Mughal — when economic dominance eroded gradually, not overnight.

What the real transition looks like

The true story of this decade isn’t gold manipulation or crypto suppression. It’s the slow-motion rebalancing of global power, as the post-WW2 order strains under its own contradictions:

· Fiscal dominance is replacing monetary orthodoxy — politics increasingly dictates central bank balance sheets.

· Fragmentation is replacing globalization — parallel payment systems (like China’s CIPS and India’s UPI stack) are nibbling at the dollar’s monopoly.

·
Asset inflation remains the political lifeline of democracies — as long as homes, stocks, and jewellery rise in nominal value, grocery inflation can be tolerated.

Digital money: Evolution, not Revolution

The tokenization of debt and the emergence of digital treasuries is definitely worth watching. But speculating that Crypto or stablecoins could “replace” outstanding treasuries may be a little far-fetched.

These aren’t part of a grand conspiracy to devalue debt — they are the next evolutionary stage of financial plumbing, blending liquidity, programmability, and regulatory control.

Think less “Nixon shock,” more “software upgrade.”

The real risk: A world without a coherent order

While investors debate gold and Bitcoin, the bigger risk is that the rules of the global system — trade, capital flows, reserve currency privileges — are eroding without a clear replacement.

This “interregnum” between the US-led order and an undefined multipolar system may prove far more destabilizing than any Fed balance sheet maneuver.

In such a world, volatility will not come from conspiracy or manipulation — it will come from institutional entropy.

Investment implications: focus on what’s observable

Instead of gaming hypothetical resets, investors may be better served by tracking:

· Real yields and the pace of balance-sheet normalization

· Fiscal-monetary coordination trends in major economies

· Shifts in global trade invoicing patterns (USD vs CNY vs others)

· Political tolerance for inequality and asset inflation

The Takeaway

Markets thrive on stories, and conspiracy is a powerful story. But history suggests that disorder, not design, drives most turning points.

The bigger challenge ahead is navigating a world that’s losing its monetary anchor and political consensus at the same time.

The “debt conspiracy” may fade, but the era of permanent volatility is just beginning.

Wednesday, August 13, 2025

Strategy review in light of the US tariffs - 2

…continuing from yesterday.

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

Dimensions of Indo-US trade

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

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

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

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

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

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

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

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

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

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

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

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

Precious metals, Engineering goods and Petroleum products are top exports

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

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

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

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

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

High risk of loss in competitive edge

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

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

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

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

Medium risk — partial substitution possible

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

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

Low risk — possible tariff pass-through

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

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

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

Items where US is significantly dependent on India

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

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

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

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

Scenario analysis

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

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

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

…to continue tomorrow

Tuesday, August 12, 2025

Strategy review in light of the US tariffs

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

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

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

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

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

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

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

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

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

Operation Shakti triggered global sanctions on India

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

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

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

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

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

Overall, the impact of sanctions was marginal.

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

Situation in 2025 is different from 1998

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

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.

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

Wednesday, June 25, 2025

Strategy for Viksit Bharat @2047

The Niti Aayog published a working paper titled “India’s Path to Global Leadership: Strategic Imperatives for Viksit Bharat @2047”, in April 2025. The paper presents a roadmap for India’s economic growth, encompassing sustainability, social inclusion, national security, and global leadership.

The paper outlines a strategic framework for achieving the goal of a developed India by 2047, by focusing on four key tasks: (i) Economic Competitiveness and Growth; (ii) National Security and Stability; (iii) Global Partnerships and Strategic Influence; and (iv)Legal Reforms and Good Governance. The paper emphasizes that successful completion of these tasks will require collective effort, collaboration, and sustained commitment across all sectors of society, government, and industry.

Summary of the working paper

Four Strategic Pillars

· Economic Competitiveness & Growth: streamline regulations, boost innovation (R&D, AI, smart cities), enhance human capital, infrastructure, and digitalization.

· National Security & Stability: modernize defense, strengthen cybersecurity, ensure internal stability, and build disaster resilience.

· Global Partnerships & Strategic Influence: expand trade and diplomatic ties, engage in multilateral forums, secure technology/resource deals, and lead on global issues.

· Legal Reforms & Good Governance: increase judicial efficiency, simplify regulations, combat corruption, and enhance transparency.

Roadmap and vision

Economic Growth

· Target sustained 8-10% annual GDP growth through structural reforms, infrastructure development, and digital transformation.

· Focus on enhancing manufacturing, services, and exports to drive economic expansion.

· Emphasize on sustainable growth, aiming for net-zero emissions by 2070 through renewable energy and sustainable practices.

Human Development

· Ensure universal access to quality education, healthcare, and skill development to build a future-ready workforce.

· Aim to reduce poverty and inequality, ensuring inclusive growth across regions and communities.

· Promote women-led development through policies enhancing workforce participation and leadership roles.

Technology and Innovation

· Attain leadership in AI, quantum computing, and green technologies to position India as a global innovation hub.

· Scale up R&D investment to 2.5% of GDP by 2047, fostering public-private partnerships.

· Achieve digital inclusion through nationwide high-speed internet and digital literacy programs.

Infrastructure Development

· Make massive investments in physical infrastructure (roads, railways, ports) and urban development to support economic growth.

· Promote smart cities and sustainable urban planning to accommodate a growing urban population.

· Develop resilient infrastructure to address climate change challenges.

Global Leadership

· Become voice for the Global South, pursue equitable global governance.

· Look for strong strategic partnerships with major economies while maintaining strategic autonomy.

· Use foreign policy to diversify supply chains and energy imports. Build coalitions for green‑tech, regulatory alignment, and IP protection. Streamline bureaucracy to support investment and tech transfer.

· Enhance India’s soft power through culture, diaspora engagement, and international cooperation.

Governance and Reforms

· Streamline regulatory frameworks to improve ease of doing business and attract FDI.

· Pursue judicial and administrative reforms to ensure efficiency, transparency, and accountability.

· Promote cooperative federalism, empowering states to align with national development goals.

Social and Environmental Sustainability

· Focus on achieving SDGs, particularly in health, education, and gender equality.

· Promote sustainable agriculture and food security through technology and policy interventions.

· Prioritize environmental conservation, including afforestation and biodiversity protection.

Security and Resilience

· Strengthen national security through modernization of defense and cybersecurity frameworks.

· Reduce reliance on foreign suppliers; diversify sourcing. Use PPPs for maintenance, land use, R&D, and MSME participation. Encourage foreign partnerships for tech transfer and joint exercises. Adopt blockchain, encryption, cybersecurity protocols.

· Update defence laws (e.g., Defence Acquisition Procedures, Defence of India Act).

· Make the planning process strong enough to build resilience against economic, environmental, and geopolitical shocks.

Key Economic Challenges

Complex regulations, poor infrastructure, low R&D investment, rigid labour laws, energy insecurity, and limited global supply‑chain integration.

Recommended Economic Reforms

· Simplify bureaucracy via e‑governance and single‑window systems.

· Modernize judiciary: fast‑track courts, digital case management, and alternative dispute resolution (ADR) mechanism.

· Reform labour laws and support gig workers.

· Strengthen education, vocational training, and industry‑academe linkages.

· Boost R&D with tax incentives, grants, and innovation hubs.

· Invest in logistics, smart cities, and digital infrastructure.

· Pursue balanced energy policy: renewables, efficiency, reserves.

· Negotiate Free Trade Agreements (FTAs), modernize Bilateral Investment Treaties (BITs), integrate into global value chains.

· Consolidate fiscal policies, optimize spending, manage debt, stabilize the rupee.

The report is more of a vision document rather than an action plan, Its sets out ambitious targets like (i) sustained annual GDP growth of 8-10%; (ii) achieving net-zero emissions by 2070; (iii) scaling up R&D investment to 2.5% of GDP by 2047; and (iv) enhancing manufacturing and services, promoting green growth, and investing in education and healthcare. It also talks about some structural reforms like (i) streamlining regulatory frameworks to improve the ease of doing business; (ii) promoting cooperative federalism; and (iii) encouraging women-led development through workforce participation policies.

However, it does not answer the question “how”. Previously several policy papers and election manifesto have spoken about these targets, tasks, goals and reforms. The execution has however been lacking consistently. It is to be seen whether things could be different this time.

If things do turn out to be different this time, we may see two decades of accelerated, sustainable and inclusive growth. As of this morning, I have little to hold this hope. But the way things are evolving globally, the situation may change quickly and dramatically. I am therefore keeping my fingers crossed and hoping for the best.

Tuesday, March 25, 2025

View from the Mars - 5

Continuing from the last week (View from the Mars – 4)

For a small investor like me, whose investment spectrum is limited to the locally available instruments and opportunities, it is critical to assimilate the impact of the global events on the local economy and markets. A natural follow-up would be to assess if a change in investment strategy and asset allocation plan is required to factor in the impact of the global events.

In most cases, the impact of global events is temporary and does not warrant any change in the investment strategy and/or asset allocation. However, some global events could have a lasting impact on the domestic economy and markets. Such events often require material change in the investment strategy and asset allocation.

It is important to note that in the past three months, the world has not witnessed any event that was not widely anticipated. The shift in the US policy (fiscal and monetary) paradigm was widely anticipated and documented. The response of the trading partners is also more or less on the expected lines. The geopolitical developments, economic growth, currencies, equities, bonds, commodities, etc. are mostly moving in the direction as was widely anticipated. In my post about outlook and investment strategy for the year 2025 (shared in the beginning of 2025), I had shared my anticipation of these events and consequent adjustments in my investment strategy and outlook.

Notwithstanding, let me again note down the important current global events that could have a material impact on the Indian economy and markets. (Please note that I have taken some inputs from AI tool Grok 3 (beta version) in preparing this post.)

Opportunities for India

Supply Chain Shift: Trump’s tariffs are pushing U.S. firms to diversify away from China. There is an potential for India to grab this opportunity. In 2024, India’s electronics exports to the U.S. spiked 22%. The Bilateral Trade Agreement (BTA) framework, as discussed by the Prime Minister and White House during the PM's February visit, could open bilateral trade opportunities worth US$200bn by 2027.

Visa curbs (H-1B denials up to 35%) might force Indian IT to onshore talent, boosting hubs like Hyderabad—Wipro’s hiring 10,000 locally, providing impetus to local economies. Less immigration pressure might also redirect diaspora skills home, powering startups. As per NASSCOM, 1,200 new startups became operational in 2024.

Defense and Tech Edge: Trump’s anti-China could tilt trade balance in favor of the Quad. India has reportedly already moved forward with $5 billion arms deals with the US, since January. COMPACT tech transfers (AI, chips) could leapfrog India’s R&D. India’s premier defense research organization (DRDO) is eyeing U.S. quantum tech.

Energy Stability: Peace in Ukraine and the Middle East, after the US intervention, could steady oil at $70-$75. India, which is 80% oil-import-dependent, saves $10 billion annually if prices don’t spike. LNG from Qatar gets cheaper too.

Trade normalization: A calm Black Sea and Red Sea (Houthi attacks down 40%) unclog shipping, allowing India’s $45 billion EU exports to flow smoothly via Suez. Peace could also revive the International North-South Transport Corridor (INSTC) with Russia-Iran, cutting freight costs 20%.

China’s Retaliation Opens Doors: China’s counter-tariffs—25% on U.S. autos and tech imports and yuan devaluation (5% drop, PBOC) makes Chinese goods pricier. India’s textiles (now up to 20% cheaper than China’s) and pharma generics (40% of the U.S. market) could take some of the US’s market from the Chinese suppliers.

Investment Inflow: China’s economic slowdown as a consequence to slower exports could reverse the flows of global capital (FDI and FPI) towards India. Though FDI into India hit $70 billion in 2024, up 12% yoy, the rate of growth in FDI flows has been declining for a few years. Weakness in USD and sharp fall in the US treasury yields could turn the global investment flows towards the emerging markets. India being one of the major emerging markets, would certainly stand to benefit.

Cheaper Capital: U.S. 10-year yields dipped to 4.3%, EU’s at 2.1% (ECB). India, having over $400 billion of external debt does benefit directly from the lower yields. Even Rupee bonds could draw more investors if yields keep sliding, easing pressure on domestic banks which are constrained by an adverse credit-deposit ratio for many months.

Export Boost: Falling inflation (U.S. PCE at 2.7%, EU at 2%) lifts disposable income of Americans and Europeans. As per GTRI, India’s consumer goods (handicrafts, apparel) could see a 10% uptick in demand due to lower inflation and a weaker dollar.

Threats for India

Export Pain: India’s $77.5 billion U.S. exports face a $7 billion hit from tariffs. Textiles and gems bleed the most. IT’s $108 billion U.S. revenue stalls if H-1B cuts force wage hikes (Trump’s 50% proposal, per ORF). Remittances (~$10 billion from the U.S.) could be materially affected.

Retaliation Risk: Retaliatory tariffs on India’s exports to the US could potentially dent some of the $45.7 billion trade surplus India enjoys with the US.

Commodity Competition: As peace returns to Russia, Ukraine and the Middle East, India’s petroleum product export and wheat exports in particular, may be adversely affected.

Dumping Threat: If China floods global markets with cheap goods, India’s MSMEs could be adversely impacted. China’s ~$30 billion trade surplus with India could balloon, straining forex reserves.

Border Tension: China’s tariff war might spill into Ladakh and Arunachal Pradesh, straining diplomatic relations and further fueling tension..

Capital Flight Risk: If U.S./EU yields crash further, investments could flow to the developed economy bonds anticipating further gains. China’s stimulus could siphon even more funds.

Demand Softness: Deflationary pressure in the West might cap India’s export growth—gems and jewelry stagnate if wallets tighten.

Conclusion

India could materially benefit from the current global events, especially U.S.-China fallout—supply chains, tech, and peace-driven energy savings could push GDP past 6.5% by 2027. However, we need to see proactive policy response and strong execution to capitalize on this opportunity. A long-term strategy is also needed to mitigate the impact of frequent tariff and VISA threats. China’s countermoves might flood or flank India, and Western yield drops could make capital flows very volatile and unpredictable. Peace helps, but only if India diversifies fast—BRICS, EU, ASEAN—to offset U.S. volatility. Trump’s bluff might crumble by 2026 if China holds firm, amplifying India’s export risks but opening manufacturing doors. A Middle East flare-up could spike oil and ruin it all.

Overall, the situation, as anticipated earlier, is very volatile and unpredictable. For now, it does not warrant any change in the investment strategy, as shared in the beginning of the year:

“2025 may be a far more challenging year for investors as compared to 2024. The volatility and uncertainty may increase materially, requiring investors to focus on capital preservation rather than making some real returns.

I shall maintain a standard allocation in 2025 and engage in active trading in my equity and debt portfolio to optimize return using the benefit of large swings. At the same time, I would continue to look for opportunities in the emerging themes for the next many years and build a long-term portfolio. Returns will not be my primary focus in 2025.”