India File: Trump-Modi standoff tests India's economy

Reuters

a day ago

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Faced with a punishing tariff of about 50% on exports of its goods into the U.S., India is pushing back and has made no public conciliatory efforts towards President Donald Trump.
A window of opportunity for repairing relations between the two countries is still open until the top tariff-rate kicks in later this month. In fact, two Indian lawmakers said on Monday India hopes trade talks with the U.S. will continue. But do the levies expose fault lines in India's economy? That's our focus this week.
And Elon Musk's X is clashing with the Indian government over internet censorship. Scroll down for more on that.
*** US, China extend tariff truce by 90 days, staving off surge in duties
*** South Korea, Vietnam leaders pledge deeper ties amid trade challenges
*** Japanese investors dump foreign stocks, pile into bonds in July as yen weakens
*** Fistful of dollars and rice for Vietnam farmers displaced for $1.5 billion Trump golf club
*** Bangladesh dengue deaths top 100, August could be worse
DEFIANCE AHEAD OF D-DAY
August 15 this year will be of extra significance for India.
Not only will the nation be celebrating its 79th Independence Day from British rule, but also it may well learn on that day about its short-term economic well-being when Trump meets his Russian counterpart Vladimir Putin to discuss the future of the war in Ukraine.
A peace deal could help ease U.S. pressure on India, which the Trump administration accused of financing the war through its oil purchases. The Russia penalty led to Trump doubling tariffs on India to near 50% - among the highest across U.S. trading partners.
Read here to understand what derailed trade talks between the two countries.
Modi has pushed back against Trump's tariffs which threaten to undo decades of diplomatic progress between the two countries.
In public comments, he has vowed to protect India's farm sector - a sticking point during the negotiations. Behind the scenes, India has paused defence purchases from the U.S., Reuters reported. Government officials denied any such pause.
And calls have grown in India to boycott U.S. goods over the tariffs.
Diplomatically, too, India has signalled defiance.
It has closed ranks with Brazil - which faces similar tariffs - while standing by its relationship with Russia and moving closer to China with Modi set to visit the neighbouring nation for the first time in seven years.
Could Trump inadvertently bring the BRICS grouping together? Read this column by Reuters' Jamie McGeever.
Through the headlines and hectic diplomacy, the Indian stock market and currency have been relatively stable and the country's central bank barely reacted, keeping its rates and economic growth forecast unchanged for the year.
At 6.5% GDP growth, the Reserve Bank of India expects the world's fifth-largest economy to grow the fastest among major economies this year.
But private economists are less sanguine and see an up to 60 basis points direct hit to GDP growth as India's $86 billion in goods exports to the U.S. are expected to suffer a sharp fall.
This could, in turn, require the government to support the export sector, which employs millions.
"If there is no swift resolution, then there could be demand from exporters for some targeted fiscal support," said Samiran Chakraborty, chief India economist at Citibank, adding that the cost of such support is difficult to gauge at this stage.
A credit guarantee scheme to help tide over a period of business disruption for small businesses and exporters is under consideration, Reuters reported on Monday.
A second-order impact could also play out as businesses look to protect their own revenues in ways that may be detrimental for the broader economy.
Indian firms in the textile and jewelry sector - which are among the largest exports to the U.S. - are already facing requests to move production lines to overseas destinations to bypass the high tariffs.
"All the customers are already calling me. They want us to ... shift from India to the other countries," Pallab Banerjee, managing director of textile manufacturing firm Pearl Global (PGIL.NS), opens new tab, told Reuters in an interview. Read that report here.
Indian jewelry firm Titan (TITN.NS), opens new tab is considering moving some of its manufacturing to the Gulf to maintain access to the U.S. market. Read here for more on the company's plans.
"Beyond 2025, the much wider tariff gap compared with other Asia-Pacific countries would severely curtail India's ambitions to develop its manufacturing sector," Moody's Ratings warned in a note last week.
Any hit to India's manufacturing sector will hurt jobs and weigh on consumption, which accounts for 60% of India's economy.
India's federal government cut personal income taxes earlier this year as signs of weakening demand emerged and the central bank has reduced interest rates by 100 basis points already, with limited room for further cuts.
As such, the onus to provide a boost to the economy towards the 8% "aspirational" growth rate laid out by the central bank recently may fall on tougher-to-do reforms.
"For the next leg of growth, perhaps it is time to look beyond monetary and fiscal support, and focus on structural reforms, in order to reach 'aspirational' levels of growth," HSBC's chief India economist Pranjul Bhandari wrote in a report last week, citing efforts to sign more trade pacts, welcome foreign direct investment and improve the business environment across states.
What fault lines do you see emerging in the Indian economy as it faces higher tariffs from the U.S.? Write to me at [e-mail], opens new tab.
Elon Musk's X and the Indian government are locked in a court battle over attempts to censor content on social media.
India contends in court documents that its approach tackles a proliferation of unlawful content and ensures accountability online.
X argues India's actions trample on free speech by empowering government agencies to suppress legitimate criticism of public officials.
Read here for that insight.
MARKET MATTERS
A stock market index of Indian IT firms, the Nifty IT Index (.NIFTYIT), opens new tab, has fallen by more than a fifth this year while the benchmark NSE Nifty (.NSEI), opens new tab has been flat as weaker global demand and a shift towards AI pressures the industry.
Tata Consultancy Services (TCS.NS), opens new tab announced last month it would cut over 12,000 jobs, which experts say could be the start of a trend that impacts nearly half a million jobs.
Read this analysis on an impending shakeup of India's outsourcing industry.