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Wednesday, February 12, 2025, 7:04 am

Wednesday, February 12, 2025, 7:04 am

Trump Effect and Banking Crunch: Dim Economic Outlook for India

Trump Effect and Banking Crunch: Dim Economic Outlook for India
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Donald Trump’s return to the presidency, marked by his controversial policies and populist rhetoric, presents a series of economic challenges for India. However, domestic economic hurdles, compounded by global uncertainties, add to the complexity of the situation.


Global Trade and the Trump Impact

Trump’s protectionist agenda, characterized by higher tariffs and restrictions on trade, is poised to have far-reaching implications for India:

  1. Chinese Dumping Threat:
    • Trump’s higher tariffs on Chinese goods will likely lead China to offload its surplus goods, including steel, electronics, and chemicals, into other markets like India at heavily discounted prices.
    • India already faces a massive $100 billion trade deficit with China, and this influx could worsen the situation for domestic manufacturers.
  2. Energy Trade Disruptions:
    • Trump’s policies could tighten sanctions on importing cheap Russian crude oil, a key resource that India refines and re-exports.
    • This would disrupt India’s oil trade strategy, impacting both its energy security and foreign exchange earnings.
  3. Strong Dollar and Weak Rupee:
    • The Trump effect on the global economy has strengthened the US dollar, causing the Indian rupee to weaken, now at ₹87 against the dollar.
    • Foreign Institutional Investors (FIIs) have pulled out $6 billion (₹47,000 crore) in January 2025 alone, further depleting foreign exchange reserves and putting pressure on the Reserve Bank of India (RBI) to intervene.

Domestic Economic Challenges

India’s domestic economy is grappling with several interconnected problems that exacerbate the challenges posed by Trump’s policies:

  1. Liquidity Crunch:
    • The RBI reported a net liquidity deficit of ₹2.5 trillion in December 2024.
    • To stabilize the rupee, the RBI has sold nearly $40 billion in foreign exchange reserves since late 2024, reducing liquidity in the banking system.
  2. High Interest Rates:
    • The liquidity crunch has driven up short-term interest rates, putting additional strain on sectors like housing and personal finance, which rely on low borrowing costs.
    • Despite calls to lower the repo rate to stimulate growth, inflationary pressures and a weak rupee leave little room for monetary easing.
  3. Sluggish Consumer Spending:
    • Inflation continues to erode household budgets, while wages remain stagnant.
    • This has stifled consumer spending, which is essential for driving GDP growth.
  4. Moderating GDP Growth:
    • GDP growth has slowed from 8.2% last year to 6.4% this year and is projected to remain moderate at 6.5% next year.
    • Without a significant revival in private investment and consumer demand, growth will remain constrained.

Trump’s Policies and India’s Software Sector

One bright spot for India’s economy, software exports, also faces risks:

  • Trump’s potential curtailment of H1B visas could hurt India’s IT sector, which relies on deploying engineers to the US.
  • The industry will need to focus on local hiring and diversifying its service portfolio to weather these changes.

A Complex Outlook: What Lies Ahead

India’s economic challenges are not solely attributable to Trump’s policies. Domestic fiscal constraints, slow wage growth, and subdued private investment are significant obstacles to achieving higher growth.

The global uncertainty under Trump’s presidency adds another layer of complexity:

  • Positive Possibility: A push for a ceasefire in Ukraine could stabilize global markets and benefit India.
  • Negative Scenario: A more isolationist and protectionist US could hurt global trade, exacerbate inflationary pressures, and further strain India’s economy.

Conclusion

India must tackle the dual challenge of navigating Trump’s disruptive policies and addressing its domestic economic issues. Reviving consumer confidence, boosting private investment, and maintaining macroeconomic stability will be critical. As the global economic environment evolves, India’s ability to adapt and strategize will determine how well it can weather this turbulent period.


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