Trump policies are not the only concern for Indian economy, we need to tackle domestic economic challenges as well

Donald Trump takes charge as the 47th President of the United States, for the second time. This time round, he won with a huge electoral margin. However, he is also the only incoming American President convicted of being a felon. Normally, a felon faces a stiff fine or a jail term as punishment, but in this case the judge decided to give unconditional discharge to the President. Trump has three other criminal and felony cases against him, which may or may not go to trial anytime soon.

Being convicted as a felon, President Trump now faces denial of entry to several countries. Even India does not give visas to convicted felons. This will pose a sensitive diplomatic challenge to many countries, where President Trump might want to visit.

This is the beginning of an unprecedented presidency. The people have voted him in very decisively despite being aware of his pending criminal cases. Trump's policies, which he plans to implement, are even more popular. The policies enjoy an approval rating ten percent more than his electoral support.

And what are those policies? They include stiff measures against “illegal aliens”; restricting entry of “legal aliens”, such as those who come on H1B visas; and imposing high import duties, especially on goods coming in from Mexico, Canada and China. His supporters, and others too, have come to believe the rhetoric that foreign producers “harvest” the American consumer market and steal American jobs.

Hence, free access to the American consumer is no longer going to be available to foreign suppliers in this next Trump regime. As such, during his previous term, from 2016 till 2020, he had imposed high tariffs on nearly one trillion dollars’ worth of goods being imported into America. That tariff will be even bigger now.

He promises to set up “External Revenue Services”, a play on “Internal Revenue Service”, which refers to the American income tax department. “Instead of pinching your pockets, I am going to pinch the pockets of those grubby foreigners who take unfair advantage of free market access,” he tells his voters.

Under Trump 2.0, the impact of policies is expected to be adverse for India in many ways. First, higher tariffs on Chinese goods coming into America, will be diverted to the third world countries. China is suffering from a slowdown and excess capacity.

This means that the Chinese will try to dump goods on other countries at very low cost, especially items like steel, non-ferrous metals, consumer electronics and chemicals. India already has a huge 100-billion-dollar bilateral trade deficit with China, which is proving tough to reduce.

The second major impact may be via sanctions against buying cheaper Russian crude oil. India benefited from importing cheap crude oil and exporting refined petrol and diesel to United States and Europe. That will be under closer scrutiny and become more difficult. A third impact is via the strong dollar, which means a weakening rupee. This makes foreign investors nervous, and that has been reflected in massive outflows.

In this month alone, till January 17, Foreign Institutional Investors (FII) have pulled out 47,000 crore or nearly 6 billion dollars, and the stock market has taken a big beating. This month the outflow has been the highest since 2008. As dollars are pulled out, the rupee has fallen to 87, and might fall further.

The pulling out of FIIs from the Indian market leads to a shortage of dollars, which makes the rupee weaker against the dollar. To prevent the drastic weakening of the rupee, the RBI sells dollars out of its precious foreign exchange reserves.

By one estimate, since the end of September 2024, the RBI might have sold close to 40 billion dollars to stem the tide. This depletes India’s stock of forex, and also reduces liquidity in the banking system. The net result is that the rupee is still falling, but banks are facing a liquidity crunch.

By the end December 2024, the RBI reported a net liquidity deficit of 2.5 trillion rupees in the banking system. This liquidity crunch makes short term interest rates shoot up. And that's not good news, since on the other hand there has been a demand for the RBI policy rate (the short-term repo rate) to be brought down.

The demand for lower interest rates is coming from the Government of India as well as from interest sensitive sectors like housing, real estate and personal finance. As such, the real disposable income of households is moving very sluggishly, thanks to inflation eating into the household budget, and wages not rising fast enough.

Hence, consumer spending growth has also been muted, causing worries about the GDP growth. As such the GDP growth this year is lower at 6.4 percent compared to 8.2 last year. Next year, too, the growth rate might be moderate at around 6.5 per cent.

Thus, Trump policies are directly affecting us be it the Chinese dumping threat, the flight of foreign investors from stock markets, a weakening rupee and the consequent liquidity crunch, continuing high interest rates and inflationary tendency.

Of course, it is incorrect to blame all our economic woes on Trump’s policies. We are also facing fiscal limits, which means pumping up growth just by government spending will not work. Private investment spending also needs to pick up.

That depends on consumer confidence and demand revival, which in turn depends on employment and wage growth. It is all interconnected. And there is a big role for psychology and sentiment. The world is watching as the uncertainty unfolds about how disruptive President Trump will be for the world economy. If he pushes for a cease fire in Ukraine that would be a plus point.

But if America hunkers down and becomes more protectionist, isolationist and mercantilist, that is not good news for free trade. His curtailment of H1B visas, currently a bright spot, can hurt India’s software exports quite adversely. We are in for a bumpy ride this year tackling the Trump  impact and domestic economic challenges.