His win has both positives and negatives for India, write PRAVAKAR SAHOO and BHAVESH GARG
Soon after the surprise win of US President-elect Donald Trump, global markets declined sharply. This was reflective of investors’ sentiments. However, stock markets in Japan, China, and other Asian countries recovered overnight from the shock.
In the US, there are already signs of increasing inflationary expectations, as determined by changes in the value of inflation-protected treasury securities. Trump's keen focus on reducing tax for corporates and individuals, while maximising Government spending, especially in defence and infrastructure sectors, accounts for this.
If Trump stands by his campaign promises, the US economy may witness a macro-economic regime change that will have implications for the rest of the world. While Trump's presidency stands to determine the balance between trade and macro-economic measures of the US, the most important question for India is: What consequences will Trump’s policies have for the world and also for the Asian economiesIJ
Free trade is one of those contentious topics that drew Trump into politics in the first place. He has for long claimed that countries like Japan and China ‘steal' American jobs. He even went on to the extent to accuse China of being a ‘currency manipulator' that uses unfair trade practices.
During his pre-election speeches, Trump opposed free-trade deals such as North American Free Trade Agreement and the Trans-Pacific Partnership (TPP). In fact, Trump has gone so far as to announce that he will scrap the 12-nation TPP. Not only does he intend to put the TPP talks on hold, but he also plans to impose tariffs of five per cent to 45 per cent on imported goods, mainly on those from China. Trump’s trade policy is ‘inward-looking' and ‘protectionist', with a focus on reducing imports and growing the manufacturing industry.
With regards to trade measures, Trump has clearly indicated that he will raise tariffs to reduce imports, and re-establish a ‘level-playing field'. This will disrupt supply chains and dampen productivity growth for many countries that trade with the US. This would mainly affect countries that have a trade surplus with the US, for instance, China, Mexico, Japan, and Germany.
As trade barriers are supposed to be fair to all countries, India's exports to the US may also be affected. It is also possible that a trade war between the US and its trading partners may halt the recovery of the global economy or may even cause another recession.
Although Trump's macro-economic plans are hardly detailed, a few thing are clear. First, he intends to revive the manufacturing sector through massive infrastructure spending and fiscal incentives to generate more jobs and raise national income. Trump's tax plan would cost him almost seven trillion dollars over a decade, which is equivalent to half the US's outstanding national debt. This is not going to be smooth without economic and political costs.
Trump's monetary policy is another cause for worry. Trump has criticised low interest rate citing it as one of the major causes for the economic bubble. Finally, Trump has promised to reduce regulation but it is not clear as to how this would work out, given his protectionist policies when it comes to trade relations.
The US was India's largest trading partner in 2015-2016, accounting for a share of 9.68 per cent in India's total trade. This shows that India is not primarily dependent on the US economy for trade. In spite of attempts by the Modi Government to reach out to Trump's team, India has received mixed signals regarding its trade prospects with the US.
There are several areas where India could reap immense benefits from Trump's win. Trump's foreign policy can upset power relations in Asia, and India could emerge as an alternative to China, in the Asian market. Over the past few years, India-US bilateral relations have developed into a ‘strategic partnership' and Trump's win in the presidential election might favour the Indian economy, given his aggressive policy against other Asian giants.
Though Trump's plans to reduce the US bilateral trade deficit and his efforts to bring manufacturing jobs back to America will hurt India's ‘Make in India' policy, its impact may not be that dramatic. The US is a technology-driven country and in the short-run, it will be difficult to develop such cutting-edge skills.
Therefore, Trump's win may be beneficial for Indian firms that export services to the US, and for Indian professionals working there. India's software services exports were worth $82 billion in 2015, out of which, close to 60 per cent went to the US. Hence, any drastic policy change regarding outsourcing can impact India's IT services sector, its employees and the remittances coming from them.
It is easier to impose tariffs on merchandise goods from China and Mexico, rather than on software services outsourced to India. Also, Indians do not take up the jobs that most Americans are qualified to do.
Indian software professionals are high-skilled immigrants and extensively use H-1B visas. Trump's views on this are ambiguous as he spoke against H-1B visas, but has also welcomed the immigration of skilled Indian professionals and has acknowledged Silicon Valley's need for them.
The value that Indian IT companies create for the US cannot be overlooked. Overall, things don’t look uncertain for India in a global economy where Trump leads the US. The world is watching.
(Pravakar Sahoo is an Associate Professor, Institute of Economic growth, Delhi and Bhavesh Garg is a Researcher, Indian Institute of Technology, Hyderabad)