Trump 2.0 and India's Economic Interests

It is fairly certain that PM Modi will tango with Trump 2.0 on GCCs, semiconductors, and renewables.

Modi and Trump at the rally in Houston in September 2019.

(Photo Courtesy: Twitter/Narendra Modi)

Trump’s first presidency (2017-2021) had shaken up the India-US economic relationship in four major areas.  

First, the US had terminated India’s preferential trade access as a developing country, making hundreds of Indian exports subject to higher non-concessional tariffs. Second, the US had come close to designating India as a currency manipulator. 

Third, visa rules were significantly changed and quotas reduced, resulting in a reduced number of immigrant visas to Indians, although the condition of higher salaries attached to jobs benefitted Indians, specifically in getting high-value visas.  

Fourth, the US walked out of the Paris Agreement and terminated its official aid for climate finance vehicles like the Green Growth Fund (GGF), targeting India prominently for being the largest free-loader beneficiary of the GGF.  

How is the United States under Trump 2.0 likely to deal with these tensions and the new economic issues that have developed in the last four years under the Biden administration?

Lot of Noise on Trade Tariffs

I wrote a piece after Trump called India the biggest charger of tariffs during his presidential campaign. Was it all rhetoric? A lot has changed in the US since the beginning of his first term in 2017. 

Before the beginning of his first term, Trump had been massively upset by the closure of coal mines and the shift of the production of big industrial goods like steel and automobiles out of America. During his first-term campaign, he had vehemently pitched for bringing manufacturing back again to the US to "Make America Great Again".  

He had to act to deliver his campaign promises which had struck a high emotional chord with the American "boomers". Unfortunately for him, his policies could not achieve any real gains in making the US a manufacturing powerhouse. Ground realities have changed a lot since he lost the election in 2020, at least in the case of coal and renewables.

Battery-supported stable thermal electricity generation was cheaper than solar power generation during his first term. It is no longer the case. The advancements in solar, wind, and hydrogen power production in the last few years have made thermal power generation an increasingly non-competitive proposition.  

Efforts to shift steel production back to the US using high tariffs under the guise of security did not succeed. The coal industry stands virtually dismantled in the US. It is unlikely that the US businesses will be incentivised enough by tariff hikes to invest in coal or steel businesses.  

There was a perceptible shift in Latino and Black voters in favour of Trump, which made all the difference in his victory. His ‘dovish’ remark to let immigrants come in legally in his first address after the re-election underlines the likelihood of a hugely less strident policy for making American manufacturing great again for blue-collar workers who had lost jobs.  

There are other factors as well. Trump may hate China but he has a soft corner for Putin, and the China-Russia economic relationship has broadened and deepened massively in the last four years. In view of all this, it seems quite certain that, while there might still be a lot of sound and fury, there may not be any drastic actions on the tariffs front.  

India has been verbally abused by Trump on account of ungainly high tariffs on some trophy products like automobiles. Most US exports to India actually do not suffer heavy tariff incidence. Again, there may be some symbolic noise against India’s tariff regime but any tough action seems unlikely.  

India and the US have been talking about a trade agreement for many years. There are massive differences in their positions and there has not been any progress. Though there might be efforts to revive the stalled negotiations, it is unlikely that there will be any headway given the irreconcilable differences in their respective positions.

On the Currency Monitoring List

The US authorities found India meeting two (trade surplus with the US exceeding $20 billion and India’s central bank buying foreign currency in excess of two percent of the GDP) out of three specified criteria (the third being current account surplus exceeding two percent of the GDP) in 2017-18, and so the Trump administration put India on the monitoring list. Countries like China, which met all three criteria during Trump 1.0, were designated as currency manipulators. 

Placing India on the monitoring list generated quite some concern in India. However, very soon, the RBI stopped buying foreign exchange for more than two percent of the GDP. In 2018-19, the RBI actually overall sold more foreign currencies than it bought. India was duly taken out of the monitoring list.  

The big fuss over currency designations of China and India in Trump’s first term was partly motivated by the intention to force the depreciation of the US dollar to improve US export competitiveness. The Biden administration, on the other hand, did not use the currency designation tool during its term.  

With the principal objective of shifting manufacturing back to America losing its stridency, the Trump 2.0 administration may also not be very keen to use this hammer. Curiously, the US dollar strengthened after Trump's victory. Both the Chinese yuan and the rupee depreciated. This might as well be indicative of the direction of the currency winds during Trump 2.0.   

Not Much Action Expected on the Immigration Front

The Biden government continued with most of the first Trump administration's immigration and visa policies.  

India has enormous financial and technical talent serving the interests of US corporations and businesses. Indians have made what Silicon Valley is today. The proliferation of global capability centres (GCCs) in India in the last few years has, in a way, provided a good solution to the need to pursue any restrictive immigration policies.  

GCCs are serving the interests of both US companies and Indian talent. The US companies get the same quality of service at a fraction of the costs, and Indian talent is happy to be able to earn better salaries than what they get otherwise besides gaining valuable experience in higher value-added jobs.

India, therefore, might witness a GCC boom during Trump 2.0. 

Climate Change Tensions 

It is climate change and the renewable energy transition which are likely to generate the sharpest tensions during Trump 2.0 which will surely dismantle or, at the very least, significantly dilute the Inflation Reduction Act (IRA), brought in the wake of high energy prices because of the Russia-Ukraine war to bring energy prices down by mainstreaming renewables and to sub-serve the Biden administration’s goal of bringing carbon emissions down.  

The Act also aims to reduce US dependence on China for renewable energy generation. Some Indian companies have been taking advantage of these provisions to export solar cells and modules to substitute Chinese imports.  

The Trump administration might replace the ban on imports from China with high omnibus import tariffs on solar cells and modules. This will take away the advantage that Indian companies have.  

It does not seem likely that Trump will walk out of the Paris Agreement again. However, it is fairly certain that all talks about America (along with other industrially developed countries) providing concessional finance to developing countries under the GGF or other instruments would certainly stop.  

India should better prepare with respect to its stand of targeting the US and other industrially advanced countries to pay under the common but differentiated responsibilities principle.  

Semiconductor Mission

India has committed to providing large subsidies to US semiconductor companies to establish chip fabrication facilities in India under the Semiconductor Mission. The US has also been spending enormous amounts of subsidies on making semiconductor fabs establish their manufacturing base in the US under the CHIPS Act.  

Trump will be constituting a Government Efficiency Commission headed by Elon Musk to downsize the government, which is likely to dismantle many American subsidies. As such large subsidies under the CHIPS Act are the antithesis to the objectives of government reduction, it will be interesting to watch what kind of package emerges from this area.

If US companies face certain benefit reductions under the CHIPS Act, they might be interested in shifting some projects to India, provided the Indian government continue to provide the kind of subsidies committed to the first five projects under the Semiconductor Mission. 

Increased semiconductor fabrication in India or joint production by US and Indian companies might provide big brownie points to both Modi and Trump, which both the showmen may like to exploit. 

A lot of what the Trump administration will do is not scrutable at the moment. What seems fairly certain, however, is that the Indian government, under the leadership of Prime Minister Modi, will tango with the US on GCCs, semiconductors, and renewables.  

Interesting times lie ahead. 

(The author is former Economic Affairs Secretary and former Finance Secretary of India. This is an opinion piece and the views expressed above are the author’s own. The Quint neither endorses nor is responsible for the same.)