Trump’s re-election! How will the Indian economy be impacted?

• How will the Indian economy be impacted once Donald Trump takes office in January 2025?
• Will India’s service industry exports be adversely affected, or will it create new opportunities for CA firms, CFOs, and GCCs?
• Robin Banerjee, The Chairman of Nucleon Research gives us a complete picture of what this means.

Robin, could you explain why the United States holds such significant importance in the global economy?

Let’s look at some numbers.

The Gross Domestic Product (GDP) in the United States is worth $29 Trillion as of 2023. The global GDP is about $105 trillion.

India’s GDP, on the other hand, stands at $3.89 trillion, which is roughly 1/7th the size of the US economy.

If the US accounts for 28% of the world’s GDP, It’s no surprise that nearly every country wants to trade with them.

More importantly, the US dollar plays a dominant role in global trade, accounting for approximately 70% of transactions.

In India’s case, 90% of all exports and imports are conducted in US dollars, or as it is officially known, the greenback.

This makes the US dollar, along with US trade and commerce, critical due to the sheer size and influence the country wields over the global economy.

How do you believe Donald Trump and his team will impact the global economy?

This is one of the most vexing questions right now.

In terms of economic priorities, there are two key elements that Donald Trump wants to achieve.

Higher Tariffs:

• Since the 1980s, Mr. Trump has been harping on about tariffs. However, it’s important to note that he’s not an economist; he’s a politician and, of course, a businessman.
• The US already has relatively high tariffs, but he intends to raise them further.
• He advocates for banning imports or imposing higher tariffs. He firmly believes that higher import tariffs will help grow the U.S. manufacturing sector.
• While this belief may not be entirely accurate, it is what he thinks.

Stricter Immigration Laws:

• He believes that immigrants, both legal and illegal, are taking jobs away from Americans. As a result, he’s determined to take action against immigration.
• This may have negative repercussions, particularly for the agriculture and food sectors, where many immigrants—both legal and illegal—work on farms and in agricultural fields.
• If these workers are removed, it raises the question of who will fill these essential roles.

How will Indians be impacted by the changes in US immigration policies?

Unfortunately, Indians will be affected adversely in some way or the other.

I’ll address this in two parts: how it will affect the student community and the working community.

Student Community:

If students are pursuing high-quality higher education, they will not be affected.

However, you also know numerous illegal colleges take in students from India, but in reality, these individuals are not genuine students – they are illegal immigrants trying to bypass the system. This will likely be impacted, which is positive for India.

For genuine higher education students attending reputable colleges and institutes, things should continue as usual. However, the number of fake or fraudulent student visas may decrease.

So, I believe this will be the case moving forward.

Working Community:

For the working community, it will also depend on the skill level.

High-skill work, particularly in fields like AI, machine learning, or IT, will likely be encouraged and unaffected.

Special skills will not face significant challenges.

On the other hand, jobs that require less skill, such as working in restaurants as a cook, chef, or server, will be impacted. The rationale here is that enough Americans are willing to take on these jobs.

However, there could be an interesting shift. If Trump’s policies lead to the removal of illegal immigrants, many jobs – particularly in agriculture, like the millions of farm jobs – could go unfilled. In this case, Indians may have an opportunity to fill these gaps.

For those with a bit of education, perhaps graduates, they may find opportunities.

But in the short term, there may be a significant pushback on H1B visas, which are essentially work visas for the U.S. This could be adversely affected in the short term.

Which Indian sectors are most vulnerable to the impact of import duties following Trump’s election?

Ever since Trump won the U.S. election, questions have arisen about how his export taxes, tariffs, and other fees will impact India.

India’s primary exports to the U.S. consist of:

IT services

• I don’t believe this area will be affected. Here’s why.
• India is considered the back office for US-based IT or professional services companies like CPA firms, providing these services at a much lower cost.
• Now, Trump is not likely to target service imports to the US as creating jobs in this sector requires education, training, and a long-term commitment.
• It’s not something that can be achieved in just four years, by the time his term ends.

Gems and Jewellery

• Trump will likely impose an import duty on gems and jewelry products.
• This is unavoidable, as these are considered luxury items, not necessities.

Pharmaceutical products

• The US pharma industry is massive, with many multi-billion-dollar companies. Many of them depend on Indian manufacturers.
• About 60% of pharmaceutical products in the US are imported, with 50% of those coming from India.
• The US has helped build India’s pharmaceutical industry over time by enforcing good manufacturing practices.
• He can’t afford to raise import duties too much on Indian pharma exports.

Electronic goods:

• If I were to mention one more sector which could be affected, it would be electronic goods.
• Trump might impose higher import duties to encourage its manufacturing in the US.

Textiles and engineering goods:

• A lot of textiles and engineering goods are also exported from India to the U.S., and these could be impacted by tariffs.

Defense exports:

• The US has a defense budget of $800 billion per year, which is likely to increase as Mr. Trump aims to build state-of-the-art defense technologies to deter China.
• Israel would have been the preferred source for the US. But as we already know, it is currently at war, and they’ve exhausted their artillery.
• As a result, the US will need to turn to other countries to import from.
• That’s where India’s defense sector could stand to benefit, especially companies providing cutting-edge technology and artificial intelligence.

The US is actively encouraging decoupling from China. What opportunities do you foresee for India as a result?

Trump has relentlessly targeted China, especially during his first term. And the same was evident during his election campaign.

So, it’s clear that the U.S. and China will find ways to decouple their economies. This means U.S. importers who rely on Chinese goods – there are hundreds of thousands of them – will need to find alternative sources.

With China now out of favour with America, it’s no longer a threat. More importantly, the country that used to grow at 8-12% per annum is now struggling to grow at 3-4%.

Their population is ageing, and the demographic shift is not helping China. So, China’s growth is essentially over, at least for the next 10 years, if not more.

Who will take China’s spot?

India is definitely the darling of the crowd. It is one of the fastest-growing economies in the world.

We have a very large captive population—140 crore people. Setting up a factory in India ensures access not only to a domestic audience but also the ability to export to the US.

Success of Apple in India

• The good news is that Apple has already started sourcing from India. Its success in increasing the production of high-tech mobile phones in India shows the potential for India to become a strong alternative to other countries.

Challenges to Overcome for India to Be More Attractive

India is the place to be, and it’s where businesses will continue to flourish for this decade, if not for the entire century.

That is unless, of course, there’s some major blunder on our part, such as political uncertainty, a war, or some natural calamity like global warming.

Ease of Doing Business

• India needs significant improvements in ease of doing business.
• If an American company wants to set up a factory, it should be able to do so within seven days, obtaining all necessary licenses and permits without delay.

Labor Laws

• Our current labour laws lack flexibility and don’t provide clear guidelines on hiring and firing.
• There is a need to implement a more flexible labour policy, akin to what was proposed in the original labour code, to benefit both employers and employees.

Legal System Reform

• The legal system in India needs reform.
• Disputes should be resolved swiftly, but the reality is that the Indian legal system is one of the slowest in the world.
• If a case gets stuck, it can remain unresolved for years.

Considering the current global economic shifts, what opportunities can CA firms, CFOs, or outsourcing/offshoring ventures tap into?

GCCs

• The rise of GCCs (Global Capability Centers) is a great example. Just three years ago, this wasn’t even a notable trend, but now, over 1700 GCCs have sprung up across the country, particularly in Bangalore.
• India will continue to serve as the back office for the US, due to its large pool of English-speaking talent.
• There are plenty of GCCs handling back-office work of foreign accounting firms, and they will continue to present significant opportunities for chartered accountants (CAs), or finance professionals.
• And opportunities in this sector will continue to grow positively, I believe.

CA firms:

• CA firms, especially those involved in back-office accounting, AI-driven accounting, management information systems (MIS), and predictive analytics, will thrive.

CFOs

• CFOs, on the other hand, must hustle to ensure Indian manufacturing is up and running so that India can become a viable “China plus one” alternative.
• As I mentioned earlier, the process of decoupling from China is likely to accelerate, which will present great opportunities for Indian industries. CFOs will quickly get permits, set up manufacturing, and get operations running at full speed.
• That being said, CFOs should keep in mind that the US dollar is likely to get strengthened under Trump’s policies.
• If the US dollar appreciates, the Indian rupee is likely to weaken, which is good for exports but not for imports.
• About 90% of Indian business is conducted in US dollars. Therefore, the dollar-rupee parity is crucial.
• CFOs should take advantage of this by pricing their products competitively to maintain cost-effectiveness.