The return of Donald Trump to the White House as the 47th President of the United States has reignited global discussions on trade, economic policies, and their ripple effects on major economies, including India. As the USA is India’s largest export destination, accounting for 18% of India’s total exports in FY24, any shifts in US policies can have significant implications for India’s economic landscape. The potential impact ranges from trade realignments to currency fluctuations, offering both opportunities and challenges for India’s economy.
Also read: Trump’s First Day: Executive Actions Signal Major Policy Shifts
Historical Context: Lessons from Trump’s First Term
Trump’s previous presidency was marked by aggressive protectionist policies, particularly the initiation of a tariff war with China. Beginning in January 2018, the US administration sharply increased tariffs on Chinese imports, escalating from 3% to 21% within 18 months. China retaliated by raising tariffs on US goods from 8% to 21%, creating a turbulent trade environment. The effects were not just confined to the two economic giants; they rippled across global markets.
India found itself in a unique position during this period. The depreciation of the Indian Rupee (INR) against the US dollar—weakening by approximately 22% (annualized) between January and June 2018—offered a short window of opportunity for foreign investors to enter the Indian market at attractive valuations. Furthermore, the tariff war created an opening for Indian exporters to step into the void left by Chinese manufacturers, particularly in textiles, chemicals, and auto components.
A similar trend could unfold in Trump’s second term. With the likelihood of renewed tariff battles, the INR may again experience short-term depreciation. However, backed by strong economic fundamentals, significant foreign exchange reserves, and improved public finances, India’s currency is expected to stabilize, ensuring a favourable investment environment.
Opportunities for India: A Strategic Advantage
One of the most prominent effects of Trump’s return could be the shift in US supply chains away from China. According to Moody’s Ratings, India stands to gain significantly as companies look to diversify their manufacturing bases in response to escalating US-China tensions.
Moody’s has said that, “In the Asia-Pacific region, the world may witness a reallocation of trade and investment flows away from China due to heightened US scrutiny in strategic sectors. This shift will likely negatively impact China’s economy and dampen regional growth. Conversely, nations such as India and those in ASEAN could find new opportunities in this changing landscape.”
India could see increased investments in key sectors such as electronics, metals, pharmaceuticals, textiles, and auto components as the US seeks to reduce its dependence on China. Additionally, Nomura’s report indicates a positive outlook for India as a strategic partner for US businesses looking to mitigate risks associated with Chinese supply chains.
Moreover, Trump’s proposed tax cuts and reforms could lead to higher disposable incomes for US consumers, indirectly benefiting India’s export sector. Sectors such as IT services and pharmaceuticals, which have traditionally been strong export areas for India, may see an uptick in demand.
The Challenge: Maintaining India’s Growth Momentum
While Moody’s suggests that India could emerge as a net beneficiary, these advantages are contingent on India’s ability to maintain its high-growth trajectory. Currently, India is projected to grow between 6.5% and 6.8% in FY24-25. However, recent economic data indicates a slowdown, with Q2 FY25 growth dropping to a seven-quarter low of 5.4%.
This deceleration is primarily driven by a decline in urban consumer spending, which traditionally accounts for over 50% of India’s GDP. Rising inflation, stagnant wages, and weak demand for discretionary goods such as automobiles have led to subdued economic activity. Additionally, lagging government capital expenditure, coupled with election-related uncertainties, further dampens economic sentiment.
For India to fully capitalize on the shifting global trade dynamics, it must reinforce domestic consumption, enhance policy stability, and accelerate infrastructure development. The government’s ability to sustain investment-driven growth, improve ease of doing business, and attract foreign direct investment (FDI) will be crucial in navigating this economic transition.
Trade Frictions and Tariff Risks
While Trump’s anti-China stance may create openings for India, it does not come without risks. His “America First” policy promotes domestic manufacturing and aims to reduce reliance on imports, which could pressure India to lower its trade barriers. This could lead to increased tariffs on key Indian exports such as pharmaceuticals, IT services, and textiles, sectors that are vital for India’s external trade balance.
Moreover, if Trump’s administration enforces stricter visa and immigration policies, it could negatively impact the Indian IT sector, which relies heavily on the H-1B visa program to send skilled professionals to the US. Any tightening of these regulations could hinder India’s service exports and employment growth in the tech industry.
The Path Forward: Strategic Policy Responses
Given the potential shifts in global trade patterns, India must adopt a proactive strategy to mitigate risks and maximize opportunities. Some key policy recommendations include:
- Enhancing Export Competitiveness: India should invest in upskilling its workforce, improving manufacturing efficiency, and expanding trade agreements with alternative markets to reduce overdependence on the US.
- Strengthening Infrastructure: Accelerating infrastructure projects and easing bureaucratic hurdles can make India a more attractive destination for foreign investors.
- Boosting Domestic Consumption: Addressing wage stagnation, supporting MSMEs, and implementing targeted fiscal policies can reinvigorate demand and sustain growth momentum.
- Negotiating Trade Agreements: India must engage in strategic trade negotiations with the US to ensure minimal disruption to key sectors while leveraging opportunities in new industries.
- Expanding Digital and Green Economies: Investing in digital transformation and renewable energy can position India as a global leader in emerging sectors, securing long-term economic gains.
Striking A Delicate Balance
Trump’s potential policy shifts present a mixed bag for India. While US-China trade tensions could open new doors for Indian businesses, India’s ability to benefit hinges on maintaining robust economic growth and consumer demand. The next few years will require careful policy navigation, ensuring that India remains an attractive destination for investment while mitigating risks associated with protectionist US policies.
By fostering a resilient economy, strengthening trade ties, and focusing on sustainable growth, India can turn the uncertainties of Trump’s return into strategic advantages. If managed well, India could emerge stronger, more competitive, and better positioned to lead in the evolving global economic order.
