Indian markets feel the chill in Trump-Modi ties

By Andy Mukherjee

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 bromance from the 2019 “Howdy Modi” event in Houston was also missing. The Indian prime minister came bearing trade concessions on Harley-Davidson bikes and Tesla cars, yet the US president met him wielding a fat stick of tariffs.

Trump set a frosty tone to the much-anticipated rendezvous 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.

This is worse than the universal levy that Trump had vowed during his campaign. While that would have affected all of America’s trading 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 in Mumbai, 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, after a top local fund manager advised them to get out of frothy small-cap stocks “lock, stock, and barrel.”

Reciprocal tariffs won’t kick in before an April 1 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, including the F-35 warplane. New Delhi has already agreed to change a civil liability law that has held up Westinghouse Electric Co.’s nuclear-power reactors for more than a decade.

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 nontariff barriers abroad. Being forced to act on at least some of these issues will not necessarily be inimical to the world’s fifth-largest economy, especially if it forces large domestic conglomerates to become more competitive.

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. The most-populous nation meets half of its growing demand for liquefied natural gas overseas, largely from suppliers in the Persian Gulf. If Indian fertilizer firms, refineries, petrochemicals makers and steel plants are forced to raise the 11% share of American LNG, they will end up shouldering additional transportation costs, inflating the country’s import bill. That, too, at a time when it’s promoting solar- and wind-powered green hydrogen as an alternative to gray H2, derived from fossil fuels.

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 previously 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 czar, who’s also a key Modi ally, controls Israel’s Haifa port and is looking to expand in Europe. Now that Trump has paused actions under the Foreign Corrupt Practices Act, the Department of Justice’s bribery charges against Adani — denied by the conglomerate — may be headed for the cold storage. Modi, who doesn’t comment on Adani at home, described the tycoon’s legal troubles as a “personal matter” that doesn’t belong to discussions between national leaders.

The stock market, however, is 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. A recently announced $12 billion tax rebate doesn’t appear to have made much difference to lackluster 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 Modi’s home state of 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.) He 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.