Currency Depreciation, tariffs and its impact on exports, and an economy that is significantly impacted; these have been a few of the bustling discussions that we have been hearing all across the news and media. But the waters are slightly murkier than they seem.
India was one of the first countries to confirm that it would negotiate a trade deal with the US at the start of the year. With talks accelerating in April, Trump whacked the so-called reciprocal tariffs, which were paused till July. However, much of the early optimism faded as we neared July, and entered into a downward spiral with respect to the tariff discussions. The recent India Pakistan conflict and Trump claiming credit for averting a 4th war between the two countries led to India admitting that relations with the US appear to be heading South. America’s push to get India to accept its genetically modified crops like maize and soyabeans put a spanner in the works, and India took a clear stand to protect local farmers and farming techniques. The chart below takes a look at how markets have moved across the tariff announcements.
With US gaining favourable trade deals from other partner countries like the UK, European Union and Japan, this tactic by the US faces a strong and clear response from India in the form of a note that is published on the ministry’s website.
As the month of July unfolded, markets closed slightly lower, owing to the announcement of a 25% tariff on all goods coming from India, starting August 1st, in addition to an unspecified penalty for buying Russian crude oil and military equipment. The imposition of tariffs in India seem to ebb from politics rather than trade relations, given the fact that China and Turkey, two countries that also import oil from Russia have not faced similar tariffs.
While Indian markets reacted to the event, they have largely remained resilient. One of the biggest factors to consider here are the historical trade relationships between the two countries; which indicate a higher dependence of the US on India. If Indian exports are impacted, we are likely to see a slight slowdown in the GDP growth rate. Moreover, manufacturing services could take a slight hit, leaving capacities unutilised. Having said that, a strong domestic demand and a depreciating rupee could help cushion some of the increase in tariffs. Despite these risks, India has strong foreign exchange reserves, which should help the country manage external volatility.
If this imposition of tariff leads to a ceasefire between Ukraine and Moscow is some sort of a wait and watch. Also, if this restrictive trade practice will actually result in the growth of the US economy and plummet it into the next manufacturing hub of the world remains questionable. Overall, we think that India’s measured and thought about approach that is focused on protecting domestic agriculture and industries is a positive.
