If you are the CEO of a global multinational corporation or the chief investment officer of a large global pension fund or a sovereign wealth fund or an insurance company, or an asset manager with a high allocation to emerging markets, India should be the least of your concerns for now. Donald Trump has won and all the scenarios that your staff planned around his potential win will now start playing out in real time. Trump’s ‘America First’ and ‘Make America Great Again’ rhetoric and soon-to-be-policies will impact countries and corporations who have: a) a commodity in which the US has/wants dominance (oil & gas—Middle East, Brazil, Indonesia); b) high technology at scale (chips, AI, new energy—Taiwan, South Korea, China, EU); c) a large goods trade surplus with US (China, Mexico, Eastern EU, ASEAN); and d) dependence on US foreign policy (Russia/Ukraine, Israel/ME, Taiwan).
The Indian state, the country’s economy and most domestic corporations do not fall under any of these categories and, hence, are unlikely to be directly impacted by Trump’s policies. Overseas investments into India, be it foreign direct investment (FDI) or foreign portfolio investment (FPI), need not be upended just because of Trump’s ‘America First’ policies. Depending on the extent of the Trump rhetoric being converted into policy, it could have some serious macro shocks on economies, business models and, hence, on investment flows into countries listed above. India, from this standpoint, is clearly a relative net beneficiary.
That is not to say that the India markets will be immune from the global gyrations. India is much more correlated to the US and its markets than what is generally expected. Hence, the volatility seen in US equities, rates, commodities, and currency will be well and truly felt in government fiscal accounts, corporate balance sheets and in the capital markets. Some of that volatility can be beneficial.
Oil prices: The average oil price during Trump’s first term was around $60 a barrel, according to Trading Economics. His commitment to ending global wars and ‘Drill, Baby Drill’ rhetoric could result in lower or capped oil prices, which is a net dividend for an oil importer like India. Trump loves deals. India can curry Trump’s favour by shifting a major part of its oil purchases to the US, away from Russia and the Middle East.
Trade and tariffs: Trump has labelled India ‘tariff king’ and ‘tariff abuser’. The US Treasury listed India as a potential currency manipulator. India will not escape Trump’s wrath on goods trade. India’s biggest export sector is services. And IT services are the country’s biggest economic activity, income, and growth driver. India’s trade minister needs to ensure that service exports remain unaffected. US corporations should be able to outsource to India and continue to be able to set up large global capability centres (GCCs) in the country. The other aspect to note is the potential tariffs on Indian electronics exports. A high tariff should not make it unviable for Apple to continue to export to the US from India.
India may be relatively better off with a higher tariff on China; however, China+1 has not really played out. India, though, will not get a better opportunity to try for a US-India trade and investment treaty. Trump and Modi dislike regional trade agreements, and Trump and Modi should secure a bilateral trade agreement.
Global investment flows—FDI: ‘America First’ policies with the support of tariffs, lower corporate taxes, and other incentives portend that US companies will continue to increase their dominance. India’s FDI flows, which are driven by private equity/venture capital flows, have already slowed down. We haven’t seen large global corporations investing in India despite the ‘Make in India’ rhetoric. We should expect a further fall in corporate FDI flows until Trump’s policies are enunciated. Under Trump, India will also struggle to attract capital from US firms to support its climate transition.
FPI: For large US and global asset allocators, the trend of buying passive US-listed equities will gain further ground and will move them away from taking ‘geopolitical’ risks of investing in faraway emerging markets like India. Despite India’s stellar public equity track record of many years, foreign investors have not committed to as many India-dedicated mandates as expected.
Bonds and currency: It feels like August 2011 again. That was a pivotal time for the US dollar as the US credit rating downgrade drove a fiscal correction and led to a strong dollar, which has continued till now. It seems like the dollar strength will continue if the Trump administration succeeds in implementing the ‘America First’ rhetoric. This has huge significance for flows into emerging markets. Bond index inclusion saw about $18-billion flows into Indian government bonds, according to NSDL data. With the spread between India and US 10-year treasuries near all-time lows, we could see outflows from India bond allocations. Many will remember that the 2013 rupee panic was triggered by foreign ‘bond tourists’ selling.
India is not immune to Trump’s impact on the global economy; however, India has the potential to triumph out of a Trump administration rather than being Trumped.
Arvind Chari is CIO, Q India UK, an affiliate of Quantum Advisors India
