Opinion
Andy Mukherjee: Indian markets have detected a chill in India’s relations with the US
Summary
- Modi’s visit to the White House was closely watched. Trump 2.0 seems to have put an end to the camaraderie of the ‘Howdy Modi’ era and investors in India have been left jittery by what this may imply.
When Narendra Modi dropped in on Donald Trump last week, there was none of the bear-hugging bonhomie that was on display at the White House Rose Garden in 2017. The hand-clasping vibes of the 2019 ‘Howdy Modi’ event in Houston was also missing. The Indian Prime Minister came bearing trade concessions on Harley-Davidson bikes and other items, yet the US president met him wielding a fat stick of tariffs.
Trump set a frosty tone when, shortly before receiving Modi, he announced reciprocal tariffs worldwide: The US will tax foreign goods at the same rate other nations apply to its products.
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This is worse than the universal levy that Trump had vowed during his campaign. While that would have affected all US trade partners, this one will hit India particularly hard. From iron, steel and auto parts to pearls, stones and mineral fuels, nine of its top 10 exports to the US would suffer incremental duties of 6 to 24 percentage points, according to economists at Kotak Mahindra Bank, who estimate the overall increase in tariff at 7 percentage points.
A loss of competitiveness in India’s biggest overseas market could put its currency under further pressure. Anticipating lower dollar returns, global stock pickers might add to the nearly $11 billion they’ve pulled out of India so far this quarter.
Capital outflows could complicate the outlook for interest-rate cuts in a slowing economy. Domestic retail investors, who have kept equity prices from cratering, could also head for the exit.
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Reciprocal tariffs won’t kick in before a 1 April review of other countries’ trade practices. That gives Modi time to start negotiating a trade deal, even though it will probably mean making more concessions, such as to Elon Musk’s Starlink satellite broadband service.
Trump is pushing India to buy more US military hardware, such as F-35 warplanes. New Delhi has already agreed to change a civil liability law that has held up Westinghouse’s nuclear-power reactors for more than a decade.
The trouble is, Trump could ask for more than just lower import duties. He may also target subsidies, regulations, value-added taxes, exchange rates, lax intellectual property protections and other non-tariff barriers abroad. Being forced to act on at least some of these issues will not necessarily be inimical to India, especially if it forces large domestic conglomerates to get more competitive.
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However, Trump’s insistence on selling more US oil and gas to India may create problems for both its balance of payments and green-energy ambitions.
India meets half its growing demand for LNG overseas, largely from Gulf suppliers. If Indian fertilizer firms, refineries, petrochem makers and steel plants are forced to raise the 11% share of American LNG, they will bear additional transport costs, inflating the country’s import bill. That, too, at a time when it’s promoting clean energy: wind, solar and also green hydrogen.
At a joint White House news conference with Modi, Trump spoke of new US-India trade routes, connected by ports and railways and passing through Italy and Israel. The revival of the proposed India-Middle East-Europe Economic Corridor, which has seen little progress since its 2023 launch, may be good news for Gautam Adani, Asia’s second-richest businessman. The infrastructure billionaire controls Israel’s Haifa port and is looking to expand in Europe.
The stock market, however, seems yet to be convinced. Shares of Adani’s flagship firm, as well as its ports unit, have been a drag on the benchmark index this quarter. After five years of strong gains, Indian equity valuations are faltering amid disappointing corporate earnings.
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A recently announced $12 billion tax rebate doesn’t appear to have made much difference to lacklustre consumer sentiment. Pocketbook concerns are becoming more important than nationalistic pride, which has been wounded by the new US administration’s decision to send back a first batch of 104 undocumented workers, including from Gujarat, on a military plane, in handcuffs and chains.
If Modi has won any assurances of better conditions for deportees in the future, he didn’t reveal them. A second plane arrived in India over the weekend. The Indian Prime Minister has, however, secured Trump’s promise to extradite a key suspect wanted for the 2008 terror attacks in Mumbai. For now, the Prime Minister and his supporters will have to be happy with that small return gift.
The ‘Howdy Modi’ era is over. Cordiality remains, but the camaraderie is gone. No matter how big a positive spin either side puts on the talk, the body language should be enough to make India’s jittery market more nervous. ©Bloomberg
The author is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.
