The mandate is clear now and Donald Trump is set to take oath as the 47th President of the United States. U.S. Elections probably wield the most significant influence on the Global Economy, Human Capital, and Financial Markets. Although recent contrarian opinions concerning the Indian context tend to differ from this view, it is far from reality.
Let’s dive into some of the economic and political ramifications of Donald Trump’s victory in India.
Economic Aspects:
IT Sector:
Broader restrictions on the H-1B visa program, which many Indian IT professionals use might impact the IT sector. This will lead to reduced movement of skilled labour, increased hiring costs for IT companies operating in the US, and reduced profitability. However, the need to counter China’s influence may lead to increased Digital Cooperation with India with increased opportunities.
During his first tenure, the Trump administration implemented restrictive policies and aimed to increase the wage requirements. While the policies could potentially impact the IT sector, as per Harsh Goenka, the Chairman of the RPG group, the risk is minimized owing to the focus on localized hiring by Indian tech companies over the recent years.
Foreign Direct Investment(FDI):
Many factors might point to a resurgence of FDI inflows into India. The Trump Administration wants to stimulate economic growth through tax cuts. Tax savings will lead to additional capital availability within US companies and a more diversified range of partnerships, triggering increased FDI flows. A profitable US corporate sector might also seek further growth opportunities in emerging markets. India’s growth prospects and government initiatives might also attract investments in sectors like Renewable Energy and Digital Services in Manufacturing. Some sectors that are poised towards growth path are – IT, Pharmaceuticals and Energy. IT posted a resounding CAGR of 13% in Trump’s previous term from 2016-20. The anticipated tax cuts could further benefit Indian firms by increasing their competitiveness in the US market.
Tariffs on Exports:
There is an underlying concern about Trump’s administration’s ‘America First’ policy that might spark protectionist trade measures and lead to increased tariffs on Indian products. Higher tariffs will lead to higher customs duties and make Indian products less competitive. This might have a detrimental impact on the Pharmaceutical, Textile and Automotive sectors. On the contrary, increased tariffs could also mean opportunities for Indian companies to counter China. Companies might want to relocate production hubs from China to India. Interestingly Trump proposed tariffs of up to 60% on Chinese-bound products. India might emerge as a destination central to the manufacturing activities of those companies due to its skilled manpower and manufacturing capability. This will boost India’s positioning in the global supply chain. The possible imposition of tariffs could lead Indian firms to explore alternative export options which will be challenging. Such a scenario can only be mitigated by focusing on policies promoting increased domestic demand. Policy precedents like ‘Atmanirbhar Bharat’ could lead to increased investments in domestic manufacturing and infrastructure improvements.
Currency Fluctuation and Investment Flows:
The Indian rupee(INR) has come under pressure and traded at an all-time low against the US dollar in the last week. The currency depreciation is owing to anticipation of increased interest rates which will make the Dollar(USD) stronger. In the last two months, Foreign Institutional Investors(FII) have significantly reduced their holdings in the Indian equities. In October, FIIs sold stock worth Rs 94000 crores. As of November, the selling trend has continued and it currently stands at Rs 32,818 crore against a gross purchase of Rs 25,707 crore resulting in a net sale of approximately Rs 7111 crore. The FII selling typically induces currency depreciation in the Indian context. When FIIs sell their investments, they convert their holdings into USD and this conversion increases the INR supply in the forex market while increasing the demand for the USD. An increase in INR supply with increased USD demand depreciates the INR. The INR depreciation creates a domino effect where FIIs continue to sell being concerned about their returns being reduced when converted to USD owing to an already depreciated INR. Although the Reserve Bank of India(RBI) has taken measures to stabilize the currency by selling USD, sustained FII selling has led to continuous INR depreciation on the INR. Furthermore, a reduced INR leads to a negative perception among investors and this significantly impacts investor sentiment leading to a reduction in capital inflows and this results in diminishing returns for Domestic Institutional Investors too. Although the fears of a big crash might be too far-fetched, a more sluggish outcome can be expected in such a scenario.
However, a weaker INR will always boost export-centric sectors by increasing competitiveness in pricing and volume. A weaker INR could also make India an attractive destination for Export-Promoting FDIs.
Political Aspects:
Strategic Partnerships and Regional Posturing:
Trump’s stance on China might benefit India, as India has its share of challenges concerning border concerns with China. There is a possibility of reinforcement of alliances like the Quad(Australia, India, Japan and the US) which will lead to increased defence cooperation, increased arms sales, technology sharing and joint military exercises.
Trump’s support for Israel and Taiwan along with his focus on countering radical terrorism could bolster India’s diplomatic stance in South Asia. The political alignment between Prime Minister Narendra Modi and US President-Elect Donald Trump might further deepen in the foreseeable future. There will be increased focus on measures that will strengthen and emphasize sovereignty and help the Indian PM navigate the ambiguities of internal constraints that might pose a security threat in future. Trump’s potential reevaluation of NATO-kind alliances might shift the geo-political weight towards India and help India gain leverage in international multilateral frameworks.
The political and economic ramifications of Trump’s presidency will be characterized by a mix of strengthening partnerships, potential economic and trade shifts and changes in immigration policies. It remains to be seen how India reshuffles its priorities with its allies in the Pacific and Middle East to counter myriad outcomes in a global framework.
