Overall, Trump's policies to impact India minimally

After Donald Trump was sworn in as the 45th president of the United States on January 20, the initial reactions were observed in the stock market sentiments in major emerging market economies (EMEs) through a sharp decline followed by an overnight U-turn. While it explains the uncertainties that come with Trump’s presidency, there is a contentious puzzle behind his economic policies, especially on the foreign policy front.

The prediction of economists and experts worldwide was of a slowing of the US economy, eventually precipitating into a recession, but the markets have however forecast an expansion.

The actual effect will depend on the counterbalancing of Trump’s macroeconomic and trade policies. Hence, we may witness a macroeconomic regime change under Trump’s era that will also have significant implications for the Indian economy.

Free trade is one of the debated areas that drew Trump into politics. His trade policies can be recognised as ‘protectionist’ and ‘inward-looking’. He has accused China of being a ‘currency manipulator’ and ‘stealing’ American jobs. He has already scrapped the Trans-Pacific Partnership (TPP) agreement and has clearly opposed the North American Free Trade Agreement (Nafta).

He further intends to impose tariffs of 5%, 10% or even 45% (mainly on Chinese goods) to curb imports and re-establish a ‘level-playing field’. Since China is the largest trading partner of the US, in case of a trade war, this would disrupt supply chains and affect production networks across Asia, with employment taking a massive hit.

In a worst case scenario, such a trade war will reduce both the US’ and trading partners’ growth and making a recession more likely. The US is a consumption-driven economy that spends more than it earns, which is reflected in its high and persistent current account deficits.

Its deficit comprises of 70% of total deficits in the world implying that its consumption fuels the world economy’s growth. This concept is called ‘exorbitant privilege’ in economics with some economists arguing that it is natural for the US to run these deficits for proper functioning of the world economy.

Although Trump’s stance on macroeconomic plans are hardly detailed, a few things are clear. First, he had expressed that there will be huge infrastructure spending and massive corporate and personal tax cuts in order to revive the manufacturing sector and create unemployment.

Second, Trump has already criticised low interest rates citing it as one of the major causes for the economic bubble. The recent increase in the Fed’s hike accompanied by the fiscal stimulus will certainly feed into higher inflationary expectations, and this will put pressure on the Fed to tighten the monetary policy.

Now if interest rates are again increased in March along the lines of Fed’s policy for increasing policy rate in 2017 to prevent overheating of the economy, then this would put pressure on the dollar to appreciate. This will culminate in larger trade deficits, which ironically is one of the major issues Trump has on his foreign policy agenda.

Implications for India: The US was India’s largest trading partner in financial year 2015-16, accounting for more than $62 billion. However, its share in India’s total trade is a mere 9.68%, implying that India is not economically too dependent on it.
The US has a huge trade deficit with China ($367 b in 2015) and given Trump’s aggressive stance against Chinese imports, this creates a natural opportunity for India to play an essential role in its “pivot to Asia” policy.

On the unfavourable side, Trump’s protectionist approach will have significant adverse impact on the Indian economy. While there is a trade policy forum established in 2005, there has been no bilateral trade agreement between the two countries. In absence of this, it is difficult to predict the uncertainty over India-US trade.

The US is also the sixth largest supplier of FDI into India and concerns were already raised about the future of bilateral investments. Over the last three months, FIIs (also known as ‘hot money’) have flown out of India on the back of Fed’s rate hike and demonetisation drive, and this has instilled a cause of worry for the external sector.

Software exports

According to the Reserve Bank of India, the country’s software services exports are worth $82 b for financial year 2014-15, of which around 60% goes to the US. Hence, any drastic measures could impact India’s services sector exports and its employment, and remittances coming from them. Trump has also unequivocally stated that he will revamp the H1B visa programme.

Recently, a legislation was introduced in the US House of Representatives to double the minimum salary of H1B visa holders to $130,000, putting excessive pressure on American employers. Under the H1B visa programme, the US-based companies hire highly skilled foreign workers that require technical expertise in specialised fields. The top 10 recipients of H1B visas in 2015 were all outsourcing firms and around 90% of H1B visas are used by the top seven Indian IT firms.

Although this may seem to be threatening for the IT-sector exports and their employees, it is difficult to understand how Trump would generate the necessary human capital to serve his purpose.

The US is a highly technology-driven economy and it seems infeasible to develop such skilled professionals in such a short period of time. The Indian IT industry in the US has created more than four lakh jobs and paid $5 b in taxes. This value addition that the Indian IT sector has created cannot be neglected.

As a final word, while it is unclear how policies will unfold under Trump’s administration, it is expected to have only minimal effect on India as the country is not economically or commercially too dependent on the US.

(The writers are researchers, Indian Institute of Technology Hyderabad, Hyderabad)