By Ajit Ranade
Donald Trump takes charge as the forty seventh president of the United States, a second time for him. He won a big electoral victory in his second attempt. But he is now the only former and incoming American president who has been convicted as a felon, which normally would have carried a sentence of a stiff fine or jail. But the judge who pronounced the sentencing declined to punish the incoming president and gave him an unconditional discharge. He also has three other criminal and felony cases which now may or may not go to trial anytime soon. Being convicted as a felon, President Trump now faces denial of entry to several countries. Even India does not give visas to convicted felons. This will pose a sensitive diplomatic challenge to many countries, where President Trump might want to visit.
This is the beginning of an unprecedented presidency. The people have voted him in very decisively despite their knowledge of his pending criminal cases. The policies that Trump has announced which he plans to implement are even more popular. The policies enjoy an approval rating ten percent more than his electoral support. What are those policies? They include stiff measures against illegal aliens, restricting entry of legal aliens such as those who come on H1B visas, imposing high import duties especially on goods coming in from Mexico, Canada and China. His supporters and others too have come to believe the rhetoric that foreign producers “harvest” the American consumer market and steal American jobs. Hence free access to the American consumer is no longer going to be available to foreign suppliers, in this next Trump regime. As such during his previous term from 2016 till 2020, he had imposed high tariffs on nearly one trillion dollars’ worth of goods being imported into America. That tariff will be even bigger now. He promises to set up an “External Revenue Services”, a play on “Internal Revenue Service” which is the name of the American income tax department. Instead of pinching your pockets, I am going to pinch the pockets of those grubby foreigners who take unfair advantage of free market access, he tells his voters.
The impact of policies of Trump 2.0 are expected to be adverse for India. Firstly, higher tariffs on Chinese goods coming into America, will divert those to third countries. China is suffering from a slowdown and excess capacity. Which means that the Chinese will try to dump goods on other countries at very low cost, especially items like steel, non-ferrous metals, consumer electronics and chemicals. India already has a huge 100-billion-dollar bilateral trade deficit with China which is proving tough to reduce.
The other impact is via sanctions against buying cheaper Russian crude oil. India benefited from the cheap crude and exporting refined petrol and diesel to United States and Europe. That will be under closer scrutiny and become more difficult. A third impact is via the strong dollar which means a weakening rupee. This makes foreign investors nervous, and that has been reflected in massive outflows. During this month of January alone, till 17 January, foreign institutional investors (FII) have pulled out 47,000 crore or nearly 6 billion dollars, and the stock market has taken a big beating. This January the outflow is the highest since 2008. As dollars are pulled out, the rupee has fallen to 87 and might fall further. In trying to defend the rupee strength, the Reserve Bank of India sells dollars. As FII’s try to get out, there emerges a shortage of dollars, which would have made the rupee weak and dollar strong. To prevent drastic weakening of the rupee, the RBI sells dollars out of its precious foreign exchange reserves. By one estimate since the end of September 2024, the RBI might have sold close to 40 billion dollars to stem the tide. This depletes India’s stock of forex and also reduces the liquidity in the banking system. And the net result is that the rupee is still falling but banks are facing a liquidity crunch. As of end December the RBI is reporting a net liquidity deficit of 2.5 trillion rupees in the banking system. This liquidity crunch makes short term interest rates shoot up. That is not good news, since on the other hand there has been a demand for the RBI policy rate (the short-term repo rate) to be brought down. The demand for lower interest rates is coming from the government of India as well as from interest sensitive sectors like housing, real estate and personal finance. As such the real disposable income of households is moving very sluggishly, thanks to inflation eating into the household budget, and wages not rising fast enough. Hence consumer spending growth also has been muted, causing worries about GDP growth. As such GDP growth this year is lower at 6.4 percent compared to 8.2 last year. Next year also the growth rate might be moderate at around 6.5 per cent
Thus, Trump’s policies directly are affecting us via the Chinese dumping threat, the flight of foreign investors from stock markets, weakening rupee and consequent liquidity crunch, continuing high interest rates and inflationary tendency. Of course, it is incorrect to blame all our economic woes on Trump’s policies. We are also facing fiscal limits, so that pumping up growth just by government spending will not work. Private investment spending also has to pick up. That depends on consumer confidence and demand revival, which in turn depends on employment and wage growth. It is all interconnected. And there is a big role for psychology and sentiment. The world is watching as the uncertainty unfolds, about how disruptive President Trump will be for the world economy. If he pushes for a ceasefire in Ukraine that would be a plus point. But if America hunkers down and becomes more protectionist, isolationist and mercantilist that is not good news for free trade. His curtailment of H1B visas can hurt India’s software exports, the current bright spot, quite adversely. We are in for a bumpy ride this year tackling the Trump impact and domestic economic challenges.
(Dr. Ajit Ranade is a noted economist). (Syndicate: The Billion Press) (email: [email protected])