Sudipto Mundle: Here’s the policy response we need to address Trump’s disruptions
Summary
- Indian fiscal and monetary policy can both work in support of economic growth. The latter has already pivoted in that direction and the former has more space now that the government has switched to keeping its debt level rather than fiscal deficit in check.
It is nearly a month since US President Donald Trump launched his trade war. Simultaneously, he has continued to wage war against immigration, decimated the US government, attacked liberal universities in America and turned American foreign policy on its head. As the shock waves of these disruptions reverberate across the world, political leaders have been scrambling to craft a response. Not an easy task, since he keeps shifting the goalposts.
On the trade policy front, for instance, after his atrocious tariff policy announcements spooked financial markets, he backed off with a partial 90-day pause for all countries except China, the US’s principal rival.
Also Read: Trump’s great tariff pause: What made him blink?
These uncertainties notwithstanding, all countries including India need to craft their policy response to contain the impact of the Trump disruption, a flexible one that can be adapted to further changes in his policies. For this, we must note that India will be impacted through two distinct channels: the direct impact of Trump’s tariff policy and the indirect impact via the adverse effects of his disruptions across a wide front on US and global growth.
In an early assessment of the impact of Trump’s disruptions in my February Mint column I had suggested that the impact would be net positive for India. I had then focused only on his three main priorities: immigration, trade and transforming US foreign policy. The specifics of his policies have evolved since then, but I would still stand by the assessment that the direct or price impact of his tariff policy will be net positive.
His so-called ‘reciprocal’ tariff policy is not reciprocal vis-a-vis the tariffs of trade partners, but their trade balance with the US, with India having a relatively modest trade surplus. This is why India faces a tariff hike to 26% despite having one of the highest tariff rates, while countries like China, Vietnam and others have been hit much harder. Hence, the post-tariff relative prices of US imports will shift in favour of India as compared to other competitors for the US market.
Meanwhile, India has moved aggressively to conclude free trade agreements with the EU, UK and others. More important, it hopes to conclude at least an interim bilateral trade agreement with the US during Trump’s 90-day pause on his new tariffs. India will probably import more hydro- carbons, small nuclear-power plants and other products from the US to reduce if not eliminate its bilateral trade surplus. In return, it is likely to seek milder tariffs, which would further enhance its gain in relative prices compared to rivals.
Also Read: Sudipto Mundle: On balance, India could gain from Trump’s policy blitzkrieg
My February column cited above had not adequately factored in the indirect impact of Trump’s disruptions, especially the decimation of US government institutions, on Indian exports and GDP growth via their adverse impact on US and global growth—the ‘income’ effect as distinct from the ‘price effect.’ I now believe that this negative income effect will dominate the positive price effect on Indian exports, thereby bringing down both export growth and GDP growth.
Analysts and columnists have been writing everyday about the adverse impact of the Trump shock. Daily real-time data is also available on the impact on financial markets, the dollar, oil prices and so on. Global uncertainty indicators are off the charts and there are estimates of the probability of a US recession ranging from 40% to 60%. But there have not been many forecasts of the actual level of US or global growth.
The International Monetary Fund has now indicated that the US economy will slow down from 2.8% in 2024 to 1.8% in 2025. Its corresponding estimate of global growth has also been pared down to 2.8%, while that for India has been marginally reduced from 6.5% to 6.2%. This is a gross under estimate of the impact of Trump’s disruptions, which could perhaps be comparable to the 2008 financial crisis.
My colleagues at the National Institute of Public Finance and Policy (NIPFP) and I have made our own projections of reduced Indian GDP growth for 2025-26, which will be presented at the NIPFP seminar on India’s economic outlook this Friday.
Also Read: Rahul Jacob: Expect an early Halloween as trade scares worsen globally
How can the adverse impact on the Indian economy be minimized?
The pandemic shock of 2020-21 demonstrated the robustness and flexibility of our macroeconomic management. When the economy contracted sharply in 2020-21, fiscal and monetary policies were reset to contain the contraction. After the economy bounced back to high growth in 2021-22, riding on the base effect of the earlier contraction, fiscal policy was recalibrated to resume fiscal consolidation, while monetary policy was gradually re-focused on its principal mandate of containing inflation, which had gone well above the target.
At present, inflation is below the central bank’s 4% target, at 3.3%. Monetary policy has already been switched to an accommodative stance to revive growth, which has been subdued. The Trump shock will further depress growth. Fiscal consolidation has also been exceeding its target and acquired more elbow room with the government’s switch from the fiscal deficit to debt-to-GDP ratio as the principal monitoring target (S. Mundle & A. Sahu, Economic & Political Weekly, 19 April 2025).
Hence, fiscal and monetary policy can both pull in the same direction of reviving growth till the dust raised by the ongoing global turmoil settles.
These are the author’s personal views.
The author is chairman, Centre for Development Studies.
