Global Economic Uncertainty Under US Trade Policies
The American president has adopted a trade policy that disrupts global economic stability and redefines traditional trade norms. His approach focuses on minimizing trade deficits with individual countries, impacting global trade dynamics.
Impact on Trade with India
- India was among the first to negotiate a trade deal with the US, but talks failed to produce a mutually beneficial outcome.
- As a consequence, the US imposed a 25% tariff on Indian goods and an additional 25% on Russian oil imports, affecting India indirectly.
- The possibility of 50% tariffs on US-bound Indian exports poses significant challenges for India's economy, which exported $86.5 billion worth of goods to the US last year.
Economic Consequences for India
- The tariffs could lead to a substantial decrease in Indian exports, impacting India's external financial stability through the current and capital accounts.
- While sectors like electronics and pharma are temporarily exempt, they may soon face tariffs.
- A reduction in exports could exacerbate the trade and current account deficits, although India's current account deficit (CAD) is currently manageable.
Capital Account Challenges
- Concerns are rising over foreign direct investment (FDI) and portfolio investments due to strained US-India trade relations.
- Net FDI in 2024-25 was a mere $350 million, and foreign investors have divested approximately $11.5 billion in Indian stocks and bonds this year.
Exchange Rate and Investor Confidence
- The rupee has depreciated approximately 2.3% against the dollar in 2025, buffered by a declining dollar index, which has decreased by over 9% this year.
- The weakening dollar suggests declining investor confidence in the US economy, creating further volatility and uncertainty in economic forecasts.
Strategic Considerations for India
- India's extensive foreign-exchange reserves should not be used to stabilize the rupee currently.
- The trade scenario indicates a structural shift, where a weaker rupee could mitigate negative effects.
- Continuous negotiation with the US is crucial, although any new trade deal is expected to come with higher tariffs.
