Ajit Ranade: Trump’s policies offer India a pretext to reset import tariffs

On the trade front, our merchandise trade deficit threatens to breach $200 billion by the end of this fiscal year. Interest obligations on foreign debt are close to $25 billion. On the capital account, net foreign direct investment (FDI), or gross inward flows less outbound investment, might hit low single digit this year. Net FDI from April to October at $14 billion was a 12-year low. Outbound FDI in the same period was $34 billion and has been steadily rising for years. 

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High-profile exits included foreign suppliers of Apple, which sold off their shares to the Tata Group. Indian companies too have invested in foreign shores, adding to dollar outflows. Whirlpool has announced that it will prune its stake in India from 51% to 20%, which also counts as outbound FDI. There are several other such examples of foreign investment winding up or being handed over to Indian owners.

The woes of a sharply falling exchange rate are partly to be blamed on trade policies of US President Donald Trump. The impact of his announcing stiff import duties of 25% on imports from Canada and Mexico, and 10% on Chinese goods has been studied in great detail by several analysts. As per an S&P economics research team, US growth will slow down, inflation and unemployment will rise, and the dollar will get stronger. 

Globally, nervous investors are snapping up US Treasury bonds, causing an upsurge in demand for dollars. The US trade and fiscal deficits are at historic highs. Already, the dollar index DXY is at 110, and reaching levels which would be the highest in the past 25 years. Of course, Trump is known to reverse decisions abruptly, so it is anybody’s guess whether the dollar’s rise would be arrested by some other sudden decision. 

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The president has proclaimed that he wants a weaker dollar to support American exports and jobs, and there is speculation whether he will force America’s trade partners into a Plaza Accord kind of deal that forces them to collectively strengthen their currencies. That accord was in 1985, during president Ronald Reagan’s second term, much before China’s rise. 

The present geopolitical situation is vastly different, and it is unclear whether America can browbeat even its allies into pushing up their currencies. Trump has also threatened to slap Brics nations with 100% import duty on their US-bound exports if they make any move toward reducing the use of the dollar in trade among themselves or with others. Trump wants to maintain the dollar’s hegemony in invoicing and as a global reserve currency, but simultaneously also wants it to be weaker against all currencies.

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It is clear that global headwinds have made India’s external situation vulnerable. Now the bright spots. Our exports of software and related services will cross $250 billion and are so far immune to tariff action. The proliferation of Global Capability Centres (GCCs) means high-quality job creation, foreign investments and strong export earnings. Inward remittances from non-resident Indians clocked $129 billion last year and are rising faster than our nominal GDP. 

Software exports and inward remittances alone can clock half a trillion dollars, more than our entire export of goods. We need to nurture these strengths. In addition, several sovereign wealth funds and pension funds intend to increase their long-term investments in Indian companies, attracted by their growth prospects. 

India’s weight in the Morgan Stanley Capital Index has been increased, which automatically increases capital inflows, especially from passively managed index funds. The China-plus-one opportunity window to attract investment in global value chains is still open.

President Trump will surely hope to extract trade concessions and defence deals from Prime Minister Narendra Modi when they meet this week. It is in India’s interest to lower import tariffs, not only to please Trump, but to increase the productivity of domestic firms. Our average tariff rates drifted upward after 2015. We have become more protectionist, ostensibly to help the ‘Make in India’ programme, which is also supported by production-linked incentives.

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But that has not happened. Instead, smaller firms that depend on imported material and components, everything from steel, chemicals and textile fibre to electronics assembly parts, have suffered a cost disadvantage. India has also used non-tariff barriers in the form of quality control orders extensively. This too was ostensibly to ward off Chinese imports, but has affected all imports. India’s merchandise exports tend to be import intensive, so tariff protection only helps large companies. Besides, a strong rupee too helps only businesses that have to service foreign debts or are net importers.

It is time for India to shift to lower tariffs across the board, get closer to Southeast Asian levels and let a weaker currency nudge exports up. Concessions to Trump can act as the pretext to usher in these much-needed trade and currency reforms.

The author is a Pune-based economist.