India's biggest issue is not Donald Trump. Supply networks and global growth may be seriously threatened by his hardline trade policies. However, tomatoes are a more pressing concern for the Mumbai central bank.
Or, more precisely, a 161% increase in tomato prices from a year ago last month, which was caused by heavy and delayed rains. Food costs are out of control, especially because potatoes and onions are getting more expensive. According to CRISIL, a division of S&P Global Inc., the average price of a home-cooked lunch in October—a typical menu of rice, roti, dal, vegetables, salad, and yoghurt was the highest in 14 months.
Even before the US election, the Reserve Bank of India was losing ground on a December rate cut. However, many observers are ruling out monetary easing before the start of the next fiscal year in April, given that inflation has spiked above the upper end of the central bank's tolerance range of 2% to 6%. By then, the actions of the incoming American president would have begun to impact the country, especially the currency rate.
Trump after the tomatoes. Both could limit the RBI's flexibility in terms of how quickly and how much it can do to aid a faltering economy. Consumer demand is being eroded by high living expenses and slow income growth, particularly in larger cities. However, the dollar is rising, and so far this quarter, foreign investors have taken more than $13 billion out of India's pricey stock market. If a global trade war replaces domestic inflationary pressures, lower interest rates in India might make the capital flight worse.
The proposed import tariffs by the US president-elect represent a threat to global production networks. They are also anticipated to delay the rate-cutting pace of the Federal Reserve and boost American consumer prices.
Indian competitors may profit from a more severe effect on Chinese exporters, but any gains in market share would be fleeting if Beijing permits the yuan to depreciate sharply versus the dollar. Furthermore, India will suffer if Trump adopts a tough-on-trade stance.
There are many reasons to believe that the Trump government will vigorously advocate for US tech companies in New Delhi. Under the Generalized System of Preferences, which has been in place for decades, Trump reduced some duty-free imports from India in 2019 due to the country's alleged inability to grant "equitable and reasonable" access to its market.
Elon Musk, who Trump appointed as the co-head of a new government efficiency agency, might be directly involved in multiple access-related disputes. Musk's Starlink Inc. wants the government to impose a fee in order to provide satellite internet services in India. The concept appears to be acceptable in New Delhi, but Sunil Bharti Mittal and Mukesh Ambani, two powerful local tycoons, are against it.
To guarantee parity between satellite and terrestrial mobile spectrum, they are calling for a competitive auction. Lobbying is becoming more and more vigorous. According to a research organization based in New Delhi, Starlink is a "wolf in sheep's clothing" because of its connections to the US military and intelligence complex.
And even as Trump pressures New Delhi to open up the market, there may be other areas where strong local firms would want to defend their territory. A projected electric vehicle factory has been the subject of years of fruitless courtship between Tesla Inc. and the Narendra Modi administration.In an attempt to support Modi's reelection campaign by luring the Tesla CEO to India, the country cut its EV import taxes in March.
India may not now have enough demand for battery-powered vehicles to justify a full-scale trade war. However, as the infrastructure for charging is put in place, that will alter. Trump must exercise caution, though, so as not to put too much pressure on Modi. Even China's BYD Co. is eager to produce EVs domestically, but it is awaiting approval of its joint venture proposal until Beijing and New Delhi's relations improve.
It may get ugly when US tech leaders are lobbying Washington for access, while Indian businesses are pressuring New Delhi for a restricted market and others are making pitches on behalf of their Chinese counterparts. It would probably be better for Trump to let Modi deal with the decline in the domestic economy first rather than unintentionally pulling economic interests in the adversaries closer together.
There will be a large number of EV purchasers in the years to come because of India's rising income and wealth disparity. The enormous bottom of the pyramid, which struggles to pay for a good dinner, requires immediate attention through a resurgence of widespread job and income development. First, let the authorities handle the tomatoes. Trump can wait with his tariffs.
