By Dr. Nilanjan Banik

The Indian economy, to quote from Charles Dickens’ novel, looks like A Tale of Two Cities. Recent estimates suggest India’s real GDP expanded by 7.8%, with strong growth noted across sectors: services (9.3%), manufacturing (10.7%), and construction (7.4%). Consumption expenditure, which is the largest component of GDP explaining 58% of GDP, also grew at around 7.6%, pointing to the resilience of the Indian economy. Other macro indicators such as Goods and Services Tax (GST) collections, sales of automobile, two-wheeler, and FMCG products complement the healthy growth in consumption expenditure, with gross GST collections growing around 7.7% in Q4 of FY 2026, passenger vehicles rising 17%, two-wheelers increasing 25%, and FMCG products posting 12% growth — the highest since June 2022.

Yet all is not well on the external front: the Indian Rupee is depreciating, the current account deficit (CAD) is widening, and net foreign direct investment (FDI) is falling. Interestingly, the depreciation of Rupee against the US dollar is not a recent phenomenon. Between 2005 and 2024, the Rupee has, on average, depreciated by around 3.5% annually. An analysis of long-term data suggests that the average annual depreciation of the Rupee was 0.4% between 2000 and 2004. The depreciation accelerated significantly after that, with the rupee depreciating on average by 3.4% annually between 2005 and 2014. This trend remained largely unchanged between 2015 and 2025, with the Rupee depreciating on average by 3.5% annually.

However, what is worrying is that in recent times, the depreciation of the Rupee has broken all earlier records. Among countries that are on a flexible exchange rate and not on a managed or fixed float — for example, Japanese Yen (6.6%), South Korean Won (7%), Indonesian Rupiah (9.3%), and the Philippine Peso (10.3%), to name a few — the Indian Rupee has depreciated the most over the last one year by around 11.2%.

Net FDI inflow is also falling. Recent estimates from the Reserve Bank of India (RBI) suggest that total amount of dollars flowing out of the country exceeded inflows by $30.8 billion in FY 26, a more than six-fold increase over FY25. India witnessed a balance of payments (BOP) surplus as recently as FY23 but took a hit, falling into negative territory from FY24 onwards. The data for FY 26 is until December 2026, with a worsening trend with the continuation of Iran-Israel-US war, starting February 2026.

BOP is the sum of the current account and the capital account. The current account captures surpluses or deficits in tradable items, while the capital account records investment flows (both direct and portfolio investments), external borrowings, and asset transfer. Over the last 5 years, any deficit owing because of trade deficits were largely financed by the surplus in services trade. India has been importing crude oil worth $130–$150 billion annually, and a significant portion of this import bill has been financed by the surplus in services, which has averaged over $240 billion during the past three years.For instance, during FY 25, India’s overall merchandize trade deficit stood at $251.6 billion in FY25, down from $286.9 billion in the previous year.

However, this trend has changed in 2026. There are two major reasons. Indian stock market has been on a downward trend.FPI are pulling out the money from India to the tune of Rs 2 lakh crore in FY 26. The recent emergence of agentic AI models has raised concerns about the future of Indian software exports, which no longer appear as promising as before. Meanwhile, the US and Taiwanese stock markets are attracting renewed investor interest, driven by strong performance in microchip and AI stocks.

Second, the war in the Middle East has also led to higher prices for crude oil, fertilizers, and chemical products, adversely affecting India’s external sector performance measured in term of BOP. The war and higher price of imports have led to dollar appreciating against the Rupee, further worsening the CAD. India has to import almost 90% of its energy requirement. Every $10 rise in global Brent crude prices is estimated to widen India’s CAD by about 0.3% to 0.5% of GDP, translating to billions of dollars.

Brent crude was trading between $66-$70 per barrel before the start of the war in February 2026, reaching to a high of $126 on 29 April 2026. Now, with the UAE’s exit from OPEC, Brent crude may continue to hover around $80 a barrel for the remainder of 2026, even if the Iran and the US decide to end the war. If the disruption persisted through the rest the rest of 2026, Brent could average $91 per barrel in fourth quarter of 2026.

Returning to the tale of two cities — for the Indian economy, the more consequential headwinds appear to be largely exogenous: geopolitical conflicts and the structural disruption of AI-driven automation, both of which lie beyond the government’s direct control. Where the government does have meaningful control, however, is in creating conditions that attract sustained Foreign Portfolio Investment (FPI) inflows, and make India a better place to do business.

For instance, at last Friday’s monetary policy meeting, the RBI outlined measures to simplify access for overseas investors to government bonds and equities. Separately, the government announced a reduction in capital gains taxes on bond investments by FPIs. The last time the Indian government initiated a bold reform measure on September 20, 2019, when it executed the largest corporate tax reduction in three decades– slashing the base corporate income tax rate for domestic companies from 30% to 22%.

The move, introduced by Finance Minister Nirmala Sitharaman, was aimed at boosting domestic investment and reviving economic growth. However, larger corporates largely used the windfall not to reinvest within India, but to acquire foreign assets abroad. Corporate investment, by and large, remained subdued. This time, the focus needs to shift toward more targeted interventions — extending tax benefits or introducing interest subvention schemes for the MSME sector, strengthening incentives for setting up Global Capability Centers (GCCs), and deepening support for India’s start-up ecosystem. Unlike the exogenous pressures of geopolitical conflict and AI-driven disruption, these are policy which are firmly within the government’s control, and the onus is on it to deploy them wisely.(IPA Service)

(The author is Professor, Mahindra University).

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By Nitya Chakraborty

U.S. commerce secretary Howard Lutnick’s stunning podcast on Thursday claiming that the bilateral India-US trade deal was almost ready but was not signed as Prime Minister did not call the U.S. President Donald Trump as was expected by the Americans. This lack of proper gesture on the part of the Indian PM sealed the fate of the early conclusion of the deal. India has missed the train, Lutnick said. Indian foreign ministry however refuted the U.S. claim but the reaction was of I general nature saying India look forward to concluding the deal.

Lutnick is the all powerful trade secretary of the Trump administration. Through him, the U.S. President pushes all the trade deals through carrot and stick policy. He himself told the New York Times in his latest interview he is the law, he takes decisions on the basis of his own moral compass, he has not to bother about international laws. So Lutnick might have said what Trump felt. Trump wanted Narendra Modi surrendering to him with folded hands for concluding the deal. Modi, for his own political reasons, rightly did not do so as desired by his one time good friend Trump. So Modi has to pay and in the process India as a nation.

Lutnick has said India has missed the train, but the fact is that nobody misses the train whatever the U.S. President has in mind. Trump likes power and at the same time, he is vulnerable to the showing of power by the other side. Just see how the powerful U.S. President has changed his stance towards the Columbian President Gustavo Petro in 48 hours after Petro, the leftwing President of a tiny Latin American nation challenged Trump and told him to take on him. Earlier Trump said that Petro is a sick man and he will not rule long. But after this challenge of Petro, Trump changed his tune and asked Petro to talk to him in the White House and sort out the issues.

Similarly, Trump gave threat to Brazil and Mexican Presidents after they strongly came out against his invasion of Venezuela. The tone was highly aggressive immediately after January 3 kidnapping of Maduro, but the tone changed within four five days as Brazil and Mexico stuck to their respective stands and started negotiations with other Latin American nations for a joint stand. Trump coerced his allies including Japan, Britain and EU to adopt a trade deal favourable to the US. The leaders of these nations compromised and agreed to Trump’s diktat. Trump was happy at that time, though now, on Greenland issue, he has taken again aggressive position saying Greenland belongs to U.S. He does not care for what decision NATO takes.

Within the framework of this global scenario, India right now is the country with the largest population of 1.4 billion plus in the world and the fifth largest economy with the possibility of becoming third by 2028. India is the only major country, a known friend of the USA with Narendra Modi as the Prime Minister, not agreeing to the diktat of the U.S. trade officials in the course of negotiations for allowing free access to the US businessmen in the Indian markets of agri products and dairy. In the last stage, Indian officials gave new concessions but on these two, they stuck rightly. The U.S. has not signed the deal, so what? Earlier also, at global level including the trade relations with the USA, there have been many such crises. India under Indira Gandhi faced a critical situation in trade relations during the era of Richard Nixon after the liberation of Bangladesh in 1971. In 2008, after the financial meltdown, the US markets collapsed in many sectors. Dr. Manmohan Singh was the Prime Minister. India dealt admirably with that crisis keeping the head of the country high.

Now, under Narendra Modi, this stalemate in India- US trade deal is continuing since April last year after Trump announced the tariff hike unilaterally and later in August announced a penalty of another 25 per cent making the tariff a total of 50 per cent. Now Trump has again given sanction to a bill recommending 500 per cent tariff for buying Russian oil which will effect India and China to some extent. Already India has reduced its supplies from Russia. This Bill will face stiff opposition in the congress. Trump is supposed to meet the Chinese President in Beijing in April this year to finalise the trade deal. The Bill is just Trump’s way of hard bargaining with China. This Bill may really not come into effect.

But looking at the Indian economy as a whole, the scenario is not all that bad. In 2025-26, the GDP growth rate is estimated at 7.4 per cent the highest among the developing countries. China is expected to have a growth rate of 4.5 to 4.6 per cent during 2025. In 2026, all projections made by the IMF and UN put the GDP growth rate of India at 6.6 to 6.7 per cent, quite comfortable. The exports might be affected in the current year but the shortfall will be manageable. The diversification process is currently on and it will have impact in the next financial year even if the U.S. tariff hike continues.

As my colleague, Dr. Nilanjan Banik explained in his column earlier , the impact of US tariffs is more likely to fall on labour-intensive sectors like gems and jewellery, textiles, food and agriculture, and footwear – most of which are run by small and micro enterprises. The good news is that the contribution of these sectors, except for gems and jewellery, to US’ total imports from India is relatively small. An estimated US$48.2 billion out of US$86.5 billion in total merchandise exports from India to the US will be subjected to 50% tariffs, translating to 1.5% of India’s GDP.

Therefore, from a policy perspective, there is a necessity to help these small and micro industries operating in the affected sectors. A 50% increase, when combined with existing base rates, fundamentally alters competitive dynamics. These small companies face unique challenges that larger corporations can more easily navigate through their superior access to capital.

Unlike large multinational corporations that can establish manufacturing bases in third countries or absorb temporary losses, smaller exporters lack such flexibility. For instance, large Indian firms in the textile, and gems and jewellery sectors are already shifting production to countries such as Ethiopia, Oman, Dubai, Bangladesh, and Vietnam—countries with lower exposure to Trump’s tariffs—a strategy that cash-strapped smaller firms cannot pursue.

A temporary subsidy programme, coupled with concessional lending arrangements where the government provides interest rate support, would create a crucial bridge during periods of trade uncertainty for the micro and small sectors.

Another initiative could focus on helping smaller exporters develop and promote their brands effectively. Branding support helps smaller companies establish distinct market identities that can command premium pricing, partially offsetting tariff disadvantages. Export-compliance assistance ensures that technical barriers do not compound tariff-related challenges, while logistics support can reduce overall cost structures. Other government initiative such as rationalisation of GST, faster refund mechanisms, and reduced compliance burdens can significantly improve the overall competitiveness of Indian exports.

Indian policy makers have adequate expertise to work on a diversification strategy for the coming period in the wake of this U.S. tariff uncertainty. This mentality of putting all eggs in one US basket has to be given up. China, Russia, Japan, the African and Latin American countries markets have to be explored to ensure that if needed, India can take care of the loss in U.S. market through new opportunities. The US importers will approach India on their own if our products remain competitive.

At the political level, Trump will be increasingly vulnerable in the coming months. At the Republican Party meeting in Washington early this week, he virtually begged to the Republicans to do well in November midterm polls. He said if the Democrats take over power, I will be impeached. Trump is really worried. So Prime Minister Modi should not rush to appease Trump. India needs US trade deal but that cannot be imposed on us- that will be on the basis of negotiations between two sovereign nations.

If Trump agrees to that, that is fine. If not and if the maverick President sticks to his present course, India should wait for the appropriate occasion for concluding the deal. There should be no hurry. In any case, Trump will not be there after his term expires in 2028. India can take care of that period if Narendra Modi sticks to retain the dignity of the nation. India is too powerful a democracy to be browbeaten by any super power. That message Narendra Modi has to convey to his one time friend Donald Trump. (IPA Service)

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By Dr. Nilanjan Banik

With the long-awaited trade deal with the US delayed, India is deepening engagement with other developed partners such as the European Union (EU) and New Zealand to secure free trade agreements (FTAs). This shift reflects New Delhi’s intent to diversify its trade relationships and reduce dependency on any single major economy. However, to fully realise the benefits of these partnerships, India will need to integrate strong environmental standards into future FTAs to ensure sustainable and responsible growth.

As global trade increasingly prioritises sustainability, India’s commitment to renewable energy aligns well with the climate goals of its prospective partners. Its green energy credentials facilitate technology sharing, joint research, and improved access to markets with stringent environmental norms, including the EU.

India has been prioritising its green targets, signalling a firm commitment to balancing economic expansion with environmental sustainability. Over the past decade, the country has aggressively expanded its renewable energy infrastructure, positioning itself as a leader in the clean energy transition. The government’s commitment to ambitious targets such as 500 GW of renewable energy capacity by 2030 and net-zero emissions by 2070 are witnessing broad-based corporate participation.

India’s cumulative solar power capacity stood at 127.33 GW as of September 2025, of which 97.15 GW came from ground‑mounted installations, 21.52 GW from grid‑connected rooftop systems, 3.26 GW from hybrid projects, and 5.40 GW from off‑grid units. According to Crisil’s Bridge to India Corporate Renewable Brief, India’s corporate renewable capacity expanded 12% quarter-on-quarter to 50,450 MW in April-June, accounting for nearly one-third of all new renewable capacity additions.

Corporate India now accounts for a sizeable share of renewable energy demand, and its choices directly determine whether national green targets are met on schedule. The government’s annual clean-energy policies and tendering systems, supported by 100% FDI for renewables, have created fertile ground for private sector investment. Encouraging signs of this transformation are visible across sectors, from mining and metals to cement, steel, and energy, as leading Indian companies translate intent into measurable climate action.

Hindustan Zinc exemplifies how resource-intensive industries are aligning with India’s broader 2030–2050 climate roadmap by pursuing a dual strategy of reducing carbon intensity and adopting cleaner technologies. Its net-zero-by-2050 plan rests on boosting renewables, which already constitute 19% of its energy mix and are targeted to reach 70% by 2027-28. At the group level, Vedanta reflects India Inc.’s accelerating clean-energy momentum, advancing a green energy strategy across its metals, power, and oil and gas businesses. In the first quarter of 2025-26 alone, it consumed nearly 850 million units of renewable power from solar, wind, and biomass sources, one of the fastest large-scale industrial transitions in the country.

The Adani Group’s trajectory underscores the same conviction but at a system scale. Adani Green Energy operates over 16 GW of renewable capacity and is targeting 50 GW by 2030. Its hybrid solar-wind and pumped-hydro projects at Khavda in Gujarat are designed to deliver round-the-clock green power and strengthen grid reliability. Reliance Industries, meanwhile, offers a complementary strategy rooted in innovation, placing its New Energy and New Materials business at the centre of its plan to achieve net-zero carbon by 2035. Building on its earlier $10 billion commitment for clean-energy infrastructure, the company is developing an integrated ecosystems for green hydrogen, solar, wind, fuel cells, batteries, and advanced materials.

In the metals sector, Tata Steel is steadily transforming one of India’s most carbon-intensive industries into a global benchmark for circular production. The company’s recently announced 966 MW hybrid round-the-clock project with Tata Power Renewable Energy aims to green a significant segment of operations by mid-2025. Tata Steel is also expanding domestic renewables manufacturing capacity with a 2 GW solar cell and 1.2 GW module facility in Odisha. JSW Group adds yet another example of ambition backed by accountability. JSW Steel aims for a 42% CO₂-intensity cut by 2030 and is piloting green-hydrogen supply at Vijayanagar with JSW Energy. JSW Energy currently operates 13,097 MW of capacity, 57% of which is renewables, and is working toward carbon-neutrality by 2050.

These companies illustrate a broader shift in India’s industrial mindset, where sustainability is emerging as an instrument of competitiveness. Globally, a record 582 GW of renewable capacity was added in 2024, a 15% jump, though still short of the 16.6% annual growth needed to stay on a 1.5°C pathway. Against this backdrop, India’s 15–16% CAGR over the past decade stands out as a relative success and will help foster new trade alliances with the developed world. By aligning its economic ambitions with its environmental commitments, India is accelerating its domestic energy transition and preparing for a new era of sustainable global trade. (IPA Service)

(The author is Professor, School of Management, Mahindra University).

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By Dr. Nilanjan Banik

Before the August 1 deadline, the U.S. President Donald Trump decided to impose a 25% tariff on Indian exports. He also talked about an additional penalty on Indian exports, which could go up to100% as a surcharge, targeting countries that continue trading oil with Russia. Trump seems to care less about ‘friend’ India, as trade with India accounts for a much smaller share compared to U.S. trade with China. Because of U.S. interests, China is likely to get a better trade deal than India, for instance removal of restrictions of U.S. chip-design software exports to China.

This is not the first time Trump has taken a hard line on India. During his earlier stint at the President not only did Trump label India as the “tariff king”, but he also removed the country from the Generalized System of Preferences (GSP). Under the GSP, established by the Trade Act of 1974, US policymakers allowed imports of around 3,500 products from designated beneficiary countries—primarily low-income nations—at a preferential duty-free (zero-tariff) rate. The aim was to help these countries increase and diversify their trade with the US. According to the World Bank, a “low-income” country is one with a per capita income of less than $1,045 per year in 2024.

As U.S. remains India’s largest export destination, it is only natural to feel the pressure with increasingly restrictive trade measures in place. Around 18% of India’s total exports are directed to the US, with a value of $77 billion in 2023, and $78 billion in 2024.

However, if previous restrictive trade measures, including the withdrawal of GSP, are any indication, then the impact has been relatively modest. A quick review of the items qualified under the GSP reveals that they primarily fall under categories such as textiles and apparel, watches, footwear, work gloves, automotive components, and leather apparel.

Among these key export categories, some items within textiles and apparel and automotive components were included in the GSP list. Additionally, exports of organic chemicals, steel, and certain engineering goods—such as nuclear boilers, machinery, and mechanical appliances—were also impacted by the withdrawal of GSP benefits. However, the value of these items as a proportion of total Indian exports to the US is relatively small. India’s exports to the US are mainly comprised of diamonds (19%), packaged medicaments (14%), refined petroleum products (8.9%), automotive components (2.1%), and textiles and apparel (3.7%). The percentages in parentheses represent the share of India’s exports to the U.S. as a percentage of India’s total exports.

The recent signing of the India-UK Free Trade Agreement (FTA) is expected to help offset some of the negative effects of excessive tariffs in the long run. Indian policymakers had anticipated a tariff around 20%, but Trump ultimately imposed a 25% rate. Thanks to the India-UK Free Trade Agreement, India stands to benefit from zero tariffs on 99% of its exports, particularly in sectors like textiles, jewellery, pharmaceuticals, automotive parts, and information technology services – areas that commentators fear could be negatively impacted by higher U.S. tariffs.

Indian exports to the U.S. are also likely to be less affected in relative terms, since Trump has unilaterally imposed tariffs on countries whose exports compete with India in the U.S. market. For example, Bangladesh (35%), Thailand (36%), Vietnam (20%), Indonesia (19%), Malaysia (25%), and the Philippines (19%) – some of India’s competitors in leather, textiles, and machinery – are equally impacted, with the numbers in parentheses indicating their respective tariff levels.

To better withstand external shocks — whether from protectionist tariffs or even war — India should focus on making its manufacturing sector/exports more competitive and focus on its domestic economy. The Indian economy benefits from a strong domestic sector, with domestic consumption, government spending, and private investment together accounting for nearly 80% of the country’s GDP.

However, the contribution of manufacturing value added to GDP remains stagnant at 17%, indicating no significant improvement in manufacturing competitiveness. Foreign Direct Investment (FDI), a key driver of technology transfer and manufacturing competitiveness, is declining, with gross FDI flows dropping to just 1% and net FDI falling to 0.6% in the first half of the 2023-24 financial year—levels not seen since 2005-06. Rigidities in the business environment, the inverted duty structure (IDS), and India’s decision to terminate bilateral treaties are to be blamed for discouraging flow of FDI.

A study by CUTS International of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. For example, apparel items priced below $14 (Rs 1,000) are subject to a GST of 5%, while those exceeding $14 are taxed at 12%. For textile manufacturers, there are also significant investments required in value-added services such as marketing, warehouse rentals, logistics, courier services, and other fulfilment costs.

However, these additional services are subject to a higher GST rate of 18%, making the products less competitive in the international market. The India budget 2025 has addressed the issue of IDS; for example, the government has increased tariffs on Interactive Flat Panel Displays from 10% to 20%, while reducing tariffs on Open Cells and related components to 5%. This trend needs to continue, and policymakers must implement further reforms to enhance the competitiveness of the manufacturing sector.

While tariff negotiations is an ongoing process, India could consider strengthening its position by increasing purchases of U.S. oil and defense equipment. During his last tenure, Trump positioned himself more as a major arms dealer, focusing on selling more weapons and oil. India has contracted for nearly $20 billion worth of US origin defense items since 2008. This trend is likely to continue in a potential Trump 2.0. India, for its part, should focus less on tariffs and more on addressing domestic distortions. (IPA Service)

(The author is Professor, Mahindra University).

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By Dr. Nilanjan Banik

Renowned Nobel laureate economist Robert Solow was once asked if having a trade deficit is bad for any economy. He answered by saying he would always have a trade deficit with his barber and would always run a trade surplus with his students. Such is the nature of the game in the realm of economic transactions. Some countries are always better at producing certain goods and services, which they export, and they gain by importing those they are not as good at producing. Arguing that the US should impose equal reciprocal tariffs is fundamentally flawed. It contradicts the principle of comparative advantage – the very foundation of international trade since the beginning of modern civilization.

If the US were to implement reciprocity in tariffs, it risked a short-term recession and, potentially, a trajectory resembling that of Argentina – a once economic miracle at the beginning of the 20th century that that ultimately declined as a result of protectionist measures. Beginning in the 1930s, Argentina imposed restrictions on labor immigration and sharply increased tariffs, resulting in long-term consequences that have contributed to its current status as a struggling and underperforming economy.

If history and economic policies are any indication, then Trump had to back down. It is not surprising that on May 12, 2025, the US and China agreed to a significant 90-day suspension of tariffs, with both nations committing to reduce duties on each other’s goods. The US tariffs on Chinese imports will decrease from 145% to 30%, while China’s tariffs on US products will drop from 125% to 10%. China on their part has also agreed to remove all trade restrictions, including the ones they imposed on rare earth materials, so important for the US electronic, defense, and green energy sectors. If China, according to the US, is successfully addresses the fentanyl crisis by strengthening domestic regulations on synthetic opioids, then this existing 30% tariff will be reduced further to 10% at the end of the 90-day period. Fentanyl, a powerful and often lethal drug, has fueled a public health crisis in the US, contributing to tens of thousands of overdose deaths annually.

Trump, being an astute businessman, always believed in the principle of testing the waters first, negotiating aggressively, and ultimately settling somewhere in between. But in this case, China seems to have the upper hand. China was always defiant, as it had little to lose. A post by a Chinese social media influencer saying, ‘Our ancestors didn’t cave in – why should we give up what we have?’ is gaining millions of views. Last March, a Chinese spokesperson publicly stated, ‘If war is what the U.S. wants, be it a tariff war, a trade war, or any other kind, we are ready to fight until the end’.

The US tariffs were never been effective containing the Chinese imports. The average annual trade deficit between the US and China went up from $311 billion during the tenure of Barack Obama (2009–2016) to $361 billion under Trump 1.0 (2017–2020), despite his aggressive stance toward China.

There are ways to evade tariffs. Since tariffs target a country’s exports, the simplest workaround is to shift the production base and export from a third country – something the Chinese have mastered. The loss in exports from China to the US is increasingly being offset by exports from countries in Southeast Asia, with US imports from the region rising by 14 percentage points between 2018 and 2023. Vietnam, Malaysia, and Thailand have emerged as primary beneficiaries. Vietnam’s exports to the US surged by 40% between 2018 and 2023, reflecting the broader trend of Chinese manufacturers shifting final assembly to third-party countries in order to bypass tariffs.

Similarly, to benefit from the US-Mexico-Canada trade alliance, Chinese firms are relocating their production base closer to the US. Take for instance, Mexico. In April 2024, the US Trade Representative Katherine Tai accused China of disguising its steel products as Mexican steel to enter the US market. In 2023, US imports of Mexican goods totalled $475 billion, approximately, $20 billion more than in 2022. During the same time the US imports of Chinese goods amounted to $427 billion, around $10 billion less. An estimated $3.7 billion of Chinese FDI came to Mexico in 2023, significantly higher with an average flow of $1.3 billion during the past decade. At least 30 Chinese firms now operate out of Mexico including Chinese automobile giants such as BYD and Cherry International. The flow of Chinese FDI to Mexico has also increased by 30% during the last two years.

On the contrary, trade interdependence between the US and China has decreased during the past decade. Between 2018 and 2024, China’s share of trade with the US has fallen from 15.7% to 10.9%. Since China has already diversified its export routes by channelling products to the US through third countries, US non-tariff measures have also become less effective. The Global Trade Alert database, reveals US has initiated more than 4525 protectionist measures against Chinese exports. However, the US trade deficit with China continued to rise.

China has enhanced the competitiveness of its manufacturing exports by continuing to shift production to locations with lower input costs. Much of the Chinese investment in the Greater Mekong Sub-region is driven by lower land and labor costs in countries such as Cambodia, Lao PDR, and Vietnam. China has invested around $1 trillion to countries in Africa, Latin America and Asia. This has helped reduce China’s energy requirements, allowing Beijing to secure cheaper foreign energy sources (oil and power) and minerals. Chinese companies have built six hydropower plants and one thermal power station in Myanmar and invested in power transmission and copper processing units in Vietnam. In countries like Sri Lanka (Hambantota port), Pakistan (Gwadar port), and throughout the Middle East, Africa, and Southeast Asia, Chinese investments are being used to develop port infrastructure, so that the cost of shipping Chinese products falls.

The concept of reciprocal tariffs will never succeed, as it assumes that a tariff on China will not impact US imports from any other third-country. Retaliation by trading partners can also impact US exports, and value of dollars which can again impact trade balance.   Real world does not operate with ceteris paribus (holding other factors constant) assumption, and sooner Trump understands this the better it is for the US economy. (IPA Service)

(The author is Professor, School of Management, Mahindra University).

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By Dr. Nilanjan Banik

The US-China trade war has been a focal point of economic discussions for a significant period, as the world’s two largest economies have imposed tariffs on each other’s goods. The Trump administration imposed 10% tariffs on Chinese imports, while China, in turn, levied 15% tariffs on US liquid natural gas (LNG) and coal, as well as 10% tariffs on oil, farm equipment, and some automobiles.

Trump’s idea of imposing tariffs is build around the narrative of “Make America Great Again.” He believes that tariffs will reduce the trade deficit by encouraging foreign companies to invest in the US. In 2017, when Trump took office for his first term the US had trade deficit with 116 countries. In 2024, the US has its largest trade deficit with China, totalling around $300 billion, followed by Mexico with over $200 billion, and a deficit of approximately $40 billion with India.

Contrary to the wishful thinking that tariffs would make a difference, data shows otherwise, as the US trade deficit with China continued to rise even after the major tariff announcement against China in 2020. The average annual trade deficit with China was $311 billion during Barack Obama’s tenure (2009-2016), rose to $361 billion during Donald Trump’s first term (2017-2020), and decreased to $327 billion under Joe Biden (2021-2024).

Tariffs may not be effective, as trade interdependence between the US and China has decreased over the past decade. Data reveals that China’s reliance on the US has declined at a faster rate. In contrast, the US continued to remain dependent on China. Between 2009 and 2024, China’s GDP grew at a compound annual growth rate (CAGR) of 9.01%. Excluding China’s trade component with the US, the Chinese economy grew at a slightly lower pace of 8.62%. In contrast, the US economy grew at a CAGR of 4.78% during the same period, and without China, the US economy’s growth rate drops to 4.07%. These small changes in growth rate numbers are significant in absolute terms, especially when considering the two largest economies in the world—the US at $29.16 trillion and China at $18.27 trillion in 2024.

There are two important takeaways from these numbers. First, trade is beneficial for any country’s growth. Second, in the event of trade war, the US economy is likely to lose out more compared to China. The result remains unchanged even if we conduct the same analysis for the past five years. It’s little wonder that Beijing’s leadership is in such a defiant mood.

Apart from the growth aspect, tariffs negatively impact jobs. A study finds that job losses from trade retaliation surpass job gains from tariff protection. In 2019, the US exports to China supported 1.2 million jobs, while 1,97,000 people were employed by Chinese multinationals – both affected by tariff escalation. Interestingly, after Trump took office in January 2025, jobless claims in Washington, D.C. surged to 1,780, with nearly 4,000 workers in the city filing for unemployment insurance.

The recent slowdown in China’s GDP is not due to US tariffs, but rather a decline in consumption demand, caused by falling property construction, an aging population, a hostile business environment, and the lingering effects of prolonged COVID-19 lockdowns.

China is no stranger to protectionism. The Global Trade Alert, a database tracking protectionist measures, reveals more than 17,737 measures have been initiated against Chinese exports. In response, Chinese policymakers recognized the need for a new approach and began heavily investing in Asia, Africa, Central America, and, to some extent, Latin America.

This strategy led to three key outcomes. First, as production costs are lower in these regions, Chinese firms are benefitting from shifting their production bases outside of China.

Second, Chinese firms were able to evade protectionist measures targeting their exports by exporting from countries outside China. Take for instance, Mexico. In April 2024, the US Trade Representative Katherine Tai accused China of disguising its steel products as Mexican steel to enter the US market. In 2023, US imports of Mexican goods totaled $475 billion, approximately, $20 billion more than in 2022. During the same time the US imports of Chinese goods amounted to $427 billion, around $10 billion less. At least 30 Chinese firms now operate out of Mexico including Chinese automobile giants such as BYD and Cherry International.

Third, investing in Africa and Asia has helped reduce China’s energy requirements, allowing Beijing to secure cheaper foreign energy sources (oil and power) and minerals. Chinese companies have built six hydropower plants and one thermal power station in Myanmar and have invested in power transmission and copper processing in Vietnam.

In countries like Sri Lanka (Hambantota port), Pakistan (Gwadar port), and throughout the Middle East, Africa, and Southeast Asia, Chinese investments are being used to develop port infrastructure.

Now that China’s actions are becoming more assertive, the US needs India not only to counterbalance China’s military influence but also as a key economic powerhouse. Trump wants India to increase its purchases of defense equipment, and oil and gas. At a time when advanced economies are adopting protectionist measures—such as the US Inflation Reduction Act and CHIPS Act, and the EU’s Net Zero Industry Act and Carbon Border Adjustment Mechanism—to re-shore manufacturing, India should seize this opportunity. However, this should be accompanied by a caveat: joint production of defense items, which would allow India to access crucial technology as a key component of trade. (IPA Service)

(The Author is Professor, Mahindra University).

The article How Can India Seize Opportunity Amidst U.S.-China Trade War appeared first on Arabian Post.

By Nitya Chakraborty

The present euphoria among the BJP-led government ministers after the presentation of the 2025-26 budget in Parliament over the mega relief to the income tax payers of the country might be shared by the estimated one crore people in the country benefited due to the budget proposals. But in terms of its impact on the consumption behaviour among the people, it will be limited and not as big as the policy makers, including Prime Minister Narendra Modi, are projecting them to be.

The twin tasks of the 2025-26 budget, the second one of the Narendra Modi government in its third term, was one, pepping up consumption, since it was sluggish in the current fiscal, and two, speedy generation of jobs for the youth as unemployment has reached an extreme crisis point. On both these counts, the 2025-26 budget proposals hold no ray of hope. The animal instinct of the budget makers, especially the Prime Minister, is lacking in the budget though this was the best time for that since the Lok Sabha elections are four years away. The ruling government faces no immediate threat to its existence.

But the BJP led government took a half-baked approach towards pepping up of consumption and consequent demand in the economy and completely gave a go by to the job generation task. The net impact will be that there will be some ripples of consumption hike in a few sectors but the total tax relief of one lakh crore, will not be able to kick start the demand cycle as other factors including the poor spending capacity of the rural and urban poor will remain stagnant adversely affecting the process of a general spurt in consumption.

Let us look at the reality about the relief of Rs. one lakh crore to the income tax payers. As per the data revealed in the 2023-24 economic survey, among the salaried, real average monthly wage for the male workers in 2023-24 was Rs. 11,858 down by 6.4 per cent from Rs. 12,665 in 2017-18. For female workers, the real wages fell more sharply during this period. What does this mean? This means a substantial section of the salaried people, especially at the lower and middle bracket had to face worse living conditions even in respect of getting some essential goods.

This section will not go to spend for new goods, rather they will try to get back some essentials which they missed during this period. For instance, a middle class salaried person who retained one tutor for his education and had to do away with him in his crisis period, will try to have him back as a result of the relief. This section will not be a contributor to the pepping up of demand. The fall in real wages in the last few years will cripple the triple effect of the income tax relief bonanza on the overall demand position in the economy.

That way, the multiplier effect of the income tax relief will be limited. This will have its impact on the private investors who will wait for more time during the next fiscal to assess the ground impact of the IT relief. The corporate sector has been the maximum beneficiary of the Modi government’s policies in the last ten years. This process was more evident in the last five years. Profits climbed by 22.3 per cent in 2023-24 but employment grew by a mere 1.5 per cent.

While the personal tax collection in 2024-25 increased by 19%, from the previous year, in the case of corporate tax, the increase was only 7%. This means that the middle class income tax payers are contributing more to the government’s tax revenues kitty compared to the corporate sector which has benefitted most during the Narendra Modi regime.

As regards the employment initiative in the 2025-26 budget, the latest report on the production linked incentive scheme is not at all promising in total though in some sectors, results have been encouraging. The CMIE’s latest report in December 2024 puts the unemployment percentage at 7.8%. The India Employment Report 2024 noted that casual workers, who constitute 25% of the workforce, get a monthly wage of about Rs 4,712. Those in the self-employed category (who form 42% of the workforce) earn around Rs 6,843 per month.

The tax relief might help to alleviate the consumption distress among the middle class (with an annual income between Rs 5 and 30 lakhs) and lower income households (with an annual income between Rs 2 and 5 lakhs). They will be cautious spenders in the consumption market as they already have pent up demand for necessities including costs for education and health.. The majority of these groups are employed in the agricultural sector, self-owned businesses, and the MSME sector. Together, they make up 70% of India’s working population with 400 million stuck in low productive agriculture sector and around 250 million in the MSME sector.

As leading economist Dr. Nilanjan Banik explained over the last few years, tax reforms have only benefitted the big corporate sectors. India’s success story in manufacturing has traditionally been driven by a capital-intensive mode of production, with major corporates like Reliance, TATA, Birla, and others dominating the sector. However, these corporate houses are not able to create enough employment opportunities which is needed for sustaining consumption. India needs jobs for millions of youth in non-high tech sectors and by creating jobs in these labour intensive areas, only the Indian problem of joblessness can be solved.

Between 2016 and 2023, people in the bottom 20 category has seen their income growth decline by 20% whereas those in the top 20 bracket has seen their income grow by 20%. The growth in income for this top 20 category is because of highly skilled new-age workforce (often foreign returned) like doctors, legal experts, engineers and MBAs working for the global consultancy firms and global capability centres of multinational based in India. On the other hand, a growing economy is also witnessing creation of low-paid and low-productive jobs such as housekeeping, security services, and other gig type jobs.

The entire approach of the Modi government in this budget is based on the so called multiplier effect of the relief of Rs. one lakh crore and projecting that the entire amount will be spent for consumption which is in reality not going to happen. Maximum Rs. 50,000 crore half of the total amount can be spent for new consumption. The people outside the income tax paying class will be struggling in the same manner without having any capacity to contribute to the demand for goods. The growth cannot take place by keeping majority of the population deprived of their spending power.

Just take a look at the dichotomy in the government policies. Flush with rupee funds, the country’s rich and the upper middle class are spending big on gold purchase and foreign travel like never before. Forex is under constant demand. Its supply being limited, INR’s exchange value on a daily basis is almost constantly dwindling. Large withdrawals by FPIs from the secondary market have further complicate the situation. In the first 11 months of 2024, India’s gold import created an all-time record of $47 billion. Who are the beneficiaries? The Gujarat-based merchants trading in gems and jewellery.

Simultaneously, rich Indians spent a record $17 billion on international travel in the last fiscal showing a 25 percent increase over the previous year. The upper sections of the Indian population are flush with funds, while the people at the lower level are struggling to take care of the daily necessities for consumption. 2025-26 budget has no vision for improving the lives of the poor and the lower middle class. It follows the same path of jobless growth and widening of equality and no big thrust to pep up consumption by giving more money in the hands of the vast populations outside the income tax paying class also. Congress leader Rahul Gandhi was right when he said that this 2025-26 budget is like putting band-aid on bullet wounds. (IPA Service)

The article Why Modi’s Gamble In 2025-26 Budget On Mega Tax Relief Will Fail? appeared first on Arabian Post.

By Dr. Nilanjan Banik

The Budget deals with allocating money towards areas where the government thinks it is essential to spend, and finding out ways such as taxes, to finance it. The government primarily requires money to spend on social infrastructure (such as schools, hospitals, water, sanitation, etc.), physical infrastructure (such as railways, roads, airports, etc.) and transferring funds to the poor and the deprived, so that distribution of income becomes more equal. But, how does one say whether a budget is good or bad? The general assumptions underlying a good budget are: it contains the fiscal deficit, carries on with the necessary reforms, and give incentives to consumers and business.

For the benefit of the reader, there are five components of demand, namely, consumption expenditure, investment expenditure, government expenditure, exports, and imports. The most important component of demand is consumption expenditure, explaining around 57 % of the national income. Generating and sustaining income would therefore call for strategies that would generate income and thereby sustain consumption.

Until the middle of 2024, the Indian economic outlook looks quite optimistic, with predictions of continued growth at a rate of over 7%. However, when India posted a lower growth rate of GDP -5.4% in the second quarter of 2024, the economic outlook quickly turned pessimistic. According to the government’s own estimate, GDP growth is expected to hit a 4-year low at 6.4%. Other metrics of economic growth are also disappointing, with declining urban and rural consumption, single-digit growth in GST collections (7.3% y-o-y in December 2024), and core infrastructure growth (4.3% y-o-y increase during November 2024).

There has been a fall in car, two-wheeler, and cement production.  In fact, the PMI (Purchasing Managers’ Index), which tracks sales, employment, inventories, and price data of manufacturing sector companies, has shown a sharp decline to 56.4 — the lowest in 12 months.

Therefore, the Finance Minister is expected to introduce policy measures aimed at boosting consumption, such as increasing tax exemptions. Additionally, efforts should be made to create a more favourable business environment by reducing the cost of doing business, for instance, through increased fund allocation for physical infrastructure and implementing necessary reforms to eliminate the long-standing inverted duty structure (IDS).

This will help to alleviate the consumption distress among the middle class (with an annual income between Rs 5 and 30 lakhs) and lower income households (with an annual income between Rs2 and 5 lakhs) which form the backbone of India’s growth story. The majority of these groups are employed in the agricultural sector, self-owned businesses, and the MSME sector. Together, they make up 70% of India’s working population with 400 million stuck in low productive agriculture sector and around 250 million in the MSME sector.

The agriculture sector has struggled to flourish, with 82% of farmers classified as smallholders, owning less than 1.15 hectares of land. Moreover, these land parcels are often not contiguous, making the mechanization of agriculture difficult and contributing to low agricultural income. India’s labour productivity – economic output per hour of work – is just 12% of the US levels. In purchasing parity terms, GDP per hour worked is $81800 for the US, in comparison to India’s $10400. This also explains lower per-capita income in India, which can only grow with more incentive for agriculture and MSME sectors.

The MSME sector which for long has suffered from the inverted duty structure (IDS). A recent study by CUTS International of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. IDS implied the MSMEs are not competitive as their input cost is higher and therefore has difficulties in scaling up.

MSMEs produce goods typically consumed by low and middle-income households, which have a higher marginal propensity to consume. These businesses are integral to daily life, offering products and services ranging from baby food and biscuits to medicines, education, healthcare, hotels, and travel.

Over the last few years, tax reforms have only benefitted the big corporate sectors. India’s success story in manufacturing has traditionally been driven by a capital-intensive mode of production, with major corporates like Reliance, TATA, Birla, and others dominating the sector. However, these corporate houses are not able to create enough employment opportunities which is needed for sustaining consumption.

Between 2016 and 2023, people in the bottom 20   category  has seen their income growth decline by 20% whereas those in the top 20 quintiles has seen their income grow by 20%. The growth in income for this top 20 quintiles is because of highly skilled new-age workforce (often foreign returned) like doctors, legal experts, engineers and MBAs working for the global consultancy firms and global capability centres of multinational based in India. On the other hand, a growing economy is also witnessing creation of low-paid and low-productive jobs such as housekeeping, security services, and other gig type jobs such as Zomato delivery boys, which in a way is contributing to widening income inequality.

Due to lack of adequate skills and inability to absorb labourers in capital intensive manufacturing, migration is happening from agriculture to low-skilled services sectors. Even for the middle-class population they are facing problem with higher cost of healthcare and education. At a time when public spending (Central and State governments taken together) is only 4.5% of GDP, it is not surprising that for a majority of the population, education is delivered by the private sector.

A higher allocation of funds towards education and healthcare is essential, alongside a focused intervention in agriculture and MSME sectors. As long-term data suggests, countries like China, South Korea, Singapore, and Thailand were able to grow their per-capita income by investing in quality primary education and healthcare systems—an approach that can be replicated through sustained, increased budgetary allocation. (IPA Service)

(The Author is Professor, Mahindra University, Hyderabad).

The article Budget 2025-26: The ‘What’, ‘Why’ And ‘How’ Of Boosting Consumption For Growth appeared first on Arabian Post.

By Dr. Nilanjan Banik

On November 30, Mr. Donald Trump posted a threat on his social media, warning that if BRICS countries abandon the US dollar, they would face a 100% tariff. This is not a new threat; similar warnings have also been directed at other regions, including nearshore friendly countries such as Mexico and China, with tariff threats spreading across various geographical areas.

A recent study by the National Retail Federation estimated that Trump’s proposed tariffs on apparel, toys, furniture, appliances, footwear, and travel goods could cost consumers an additional $46 billion to $78 billion annually. All of this means higher prices for the consumers, and the US sellers of Chinese goods fear a loss in business due to the price hikes induced by the tariffs.

While China is expected to bear the brunt of the tariffs, other neighbouring countries, including India, are not likely to be exempted. Not only did Trump label India as the “tariff king”, but he also removed the country from the Generalized System of Preferences (GSP), during his last tenure as President. Under the GSP, established by the Trade Act of 1974, US policymakers allowed imports of around 3,500 products from designated beneficiary countries—primarily low-income nations—at a preferential duty-free (zero-tariff) rate. The aim was to help these countries increase and diversify their trade with the US.

According to the World Bank, a “low-income” country is one with a per capita income of less than $1,045 per year in 2023. With India’s per capita income at around $2,700 annually, Trump’s position is technically correct: Indian firms may no longer qualify for preferential treatment under the GSP, given that India no longer meets the low-income threshold.

As the US remains India’s largest export destination, it is only natural to feel the pressure with increasingly restrictive trade measures in place. Around 18% of India’s total exports are directed to the US, with a value of $77 billion in 2023, and $78 billion in 2022.

However, if previous restrictive trade measures, including the withdrawal of GSP, are any indication, then the impact has been relatively modest. A quick review of the items qualified under the GSP reveals that they primarily fall under categories such as textiles and apparel, watches, footwear, work gloves, automotive components, and leather apparel. India’s exports to the US are mainly comprised of diamonds (19%), packaged medicaments (14%), refined petroleum products (8.9%), automotive components (2.1%), and textiles and apparel (3.7%). The percentages in parentheses represent the share of each category in India’s total exports to the US.

Among these key export categories, some items within textiles and apparel and automotive components were included in the GSP list. Additionally, exports of organic chemicals, steel, and certain engineering goods—such as nuclear boilers, machinery, and mechanical appliances—were also impacted by the withdrawal of GSP benefits. However, the value of these items as a proportion of total Indian exports to the US is relatively small.

During the previous period of the Trump administration, he imposed tariffs primarily on items such as toys, household appliances, footwear, travel goods, apparel, and furniture. Again, these items do not feature among India’s top exportable items. In 2023, India became the second-largest exporter of refined petroleum, with exports valued at $85 billion and a global market share of 12.6%. Other major exports from India include insecticides and fungicides (10.5%), steel (12.7%), beet sugar (12.21%), rubber tyres (3.31%), and gemstones (36%), with the global market share figures indicated in parentheses.

Therefore, from the perspective of Trump’s tariffs and a hawkish trade policy measures has little to explain India’s burgeoning trade deficit. Most of India’s key exports are income-sensitive, and weak global demand is having an impact. On the other hand, a strong Indian economy drives higher demand for energy and fossil fuels, the majority of which are imported.

The government took several steps to address the widening current account deficit. India continues to import discounted oil from Russia, with its share in the trade basket rising from 1% to 22%. Last year, India banned the export of 100% broken rice, used in ethanol production. To curb gold imports, customs tariffs were increased from 7.5% to 12.5%. Initiatives like Atmanirbhar Bharat and the Production Linked Incentive (PLI) schemes aimed at boosting export competitiveness are also undertaken.

However, the contribution of manufacturing value added to GDP remains stagnant at 17%, indicating no significant improvement in manufacturing competitiveness. Foreign Direct Investment (FDI), a key driver of technology transfer and manufacturing competitiveness, is declining, with gross FDI flows dropping to just 1% and net FDI falling to 0.6% in the first half of the 2023-24 financial year—levels not seen since 2005-06. Rigidities in the business environment, the inverted duty structure (IDS), and India’s decision to terminate bilateral treaties are to be blamed for discouraging flow of FDI.

Consider two of the most important sectors dominated by foreign manufacturing giants, namely, automobiles and carbonated soft drinks (CSDs). Both these industry attract highest possible rate of goods and services tax (GST) which is 28% with additional cess taking up the total duty to up to 40%.

India stands out for imposing high taxes on CSDs, unlike the global practice of taxing sugary beverages. The high taxes on low- and zero-sugar CSDs contradict WHO recommendations and those of health experts, who favour a tax based on sugar content. Over 120 countries have adopted layered tax policies, where lower sugar content attracts lower taxes, to encourage healthier product reformulation. Similarly, when state governments impose high road taxes on automobiles, the assumption that demand is inelastic and consumers will pay regardless is ultimately undermining foreign investments.

A recent study of 1,464 tariff lines across textiles, electronics, chemicals, and metals reveals how the IDS is hurting competitiveness, with 136 items from textiles, 179 from electronics, 64 from chemicals, and 191 from metals most affected. For example, apparel items priced below $14 (Rs 1,000) are subject to a GST of 5%, while those exceeding $14 are taxed at 12%. In fact, the government has recently proposed that garments priced between Rs 1,500 and Rs 10,000 will be taxed at 18%, while apparel priced above Rs 10,000 will fall under the highest GST slab of 28%.

This level of hike in indirect tax can undermine export competitiveness and increase price up to 8% in the world market. For textile manufacturers, there are also significant investments required in value-added services such as marketing, warehouse rentals, logistics, courier services, and other fulfilment costs. However, these additional services are taxed at a higher GST rate of 18%. This creates an inverted duty structure, where the tax on inputs is higher than the tax on the final product.

During his last tenure, Trump positioned himself more as a major arms dealer, focused on selling more weapons. India has contracted for nearly $20 billion worth of US origin defense items since 2008. This trend is likely to continue in a potential Trump 2.0. India, for its part, should focus less on tariffs and more on addressing domestic distortions. (IPA Service)

(The author is Professor in Economics, Mahindra University).

The article Trump 2.0: India’s Real Concern Lies In Domestic Distortions, Not Tariffs appeared first on Arabian Post.

By Dr. Nilanjan Banik

Donald Trump made history by winning a larger share of Black and Hispanic votes compared to 2020, and by becoming the first since George W. Bush to win based on popular votes. There had already been indications of Trump winning, although not by such a decisive margin. Initially, the US betting industry was predicting a Trump win. Then, there was the indication from the US stock market. In October, the stocks owned by Trump, performed much better than the stocks listed in S&P 500. More importantly, Trump is being funded by major corporations and is supported by the White Protestants and Catholics. Historically, the US business leaders have consistently supported Republicans. Between 2007 and 2017, 57% of the CEOs of S&P 1500 companies contributed politically to the Republican Party, 19% gave to the Democrats, and the rest split their contributions between the two parties.

Source: Cohen et. al., (2019).

Available at: https://www.nber.org/system/files/working_papers/w25815/w25815.pdf

In fact, big businesses support Trump’s plan to cut corporate taxes. More importantly, few of the American corporate houses like the idea of Trump protecting them by imposing tariffs, especially on Chinese goods. On economic front the US accuses China of unfair trade practices related to forced technology transfers and intellectual property theft. The business elites are supported by the political elites who are concerned that China is leveraging its newfound dominance in electronic exports for espionage, prompting the US to place leading Chinese firms like Huawei, ZTE Tech, on its trade restriction list in 2019. The China bashing initiated during Trump’s presidency continued, with the US criticizing China for human rights abuses in Xinjiang, the draconian security law in Hong Kong, its handling of COVID-19, and even taking steps to ban the social media app TikTok. The US now trades more goods and services with the European Union, Canada, and Mexico than it does with China.

With Trump winning, harsher economic and political sanctions are likely on the horizon. Basic economic theory states that while the government generates revenue by imposing tariffs, it is the domestic consumers who ultimately bear the burden of those tariffs. A new paper from the Peterson Institute for International Economics finds that presidential candidate Trump’s proposed 10% across-the-board tariffs and 60% tariff on imports from China would cost the average American household around $1,700 a year. These tariffs could lead to increased prices for consumer goods, making it challenging for the Fed to meet its inflation target of 2%.

Contrary to the popular rhetoric surrounding job creation, higher tariffs actually have a negative impact on domestic employment and income. A study finds that job losses from trade retaliation surpass job gains from tariff protection. In 2019, the US exports to China supported 1.2 million jobs, while 197,000 people were employed by Chinese multinationals—both affected by tariff escalation. Another related study pointed out, the job losses due to cheap imports is significantly less than the benefits to the US consumers in terms of lower price and income generation. While consumers enjoyed lower prices and a 13-percentage point increase in incomes, the negative impact on account of job loss is only 1-percentage point.

What policymakers fail to understand is that in the age of globalization, trade has become increasingly fungible. To avoid US tariffs, the Chinese manufacturers are now using Mexico as a backdoor. For the first time in two decades, Mexico has overtaken China as the largest exporter of goods to the US. In 2023, Mexican goods imported to the US totalled $475 billion, approximately $20 billion more than in 2022. During the same period, Chinese goods imports to the US amounted to $427 billion, about $10 billion less than the previous year. An estimated $3.7 billion Chinese FDI flow came to Mexico in 2023, which is significantly higher with an average flow of $1.3 billion during the previous decade.

Chinese companies are relocating their raw materials and manufacturing to Mexico to capitalize on the nearshoring trend, as Mexico is a partner country in the United States-Mexico-Canada Agreement (USMCA), formerly known as NAFTA. At least 30 Chinese firms now operate out of Mexico. For example, Chinese car manufacturers BYD and Chery International are establishing operations in the country. Container traffic from China to Mexico has surged in recent years, with a 22% increase in 2024 compared to the previous year. In 2023, the increase was even more pronounced, at 33% over 2022.  2022 and 2023 also marked the highest volumes of exports from Mexico to the US. To take advantage of increasing volume of US-Mexico trade, freights companies like Uber Freights, Maersk Line, and DHL are setting up logistic and warehouse facilities on both side of the Mexico-US borders.

Therefore, Trump cannot safeguard the US economy solely through harsh rhetoric toward China. On the contrary, now that Trump has won theelection, the world is likely to become more bipolar, with China poised to gain economically. Protectionism and jingoism are likely to divert investment into a wasteful war economy, rather than towards more productive activities like addressing climate change. According to Australia’s Lowy Institute, in 2001, the year China joined the World Trade Organization, over 80% of countries with available data had a larger volume of trade with the US than with China.

By 2018, that figure had decreased to just over 30%, with two-thirds of countries (128 out of 190) trading more with China than with the US.Over the last decade China has spent more than a trillion dollar in over 140 countries on infrastructure investment, thereby building an economic relationship. High-speed railways in Indonesia, ports in Pakistan and Sri Lanka, bridges in Zambia, and intercontinental highways in Central Asia are all examples of how China is increasingly strengthening its economic and financial ties around the world. A more protectionist strategy from Trump will only further alienate the US and its economy. (IPA Service)

(The Author is Professor, Mahindra University, Hyderabad).

The article Chinese Economy May Get A Boost If Trump Sticks To His Proposed High Tariff appeared first on Arabian Post.

By Dr. Nilanjan Banik

In 2009, the Swedish car company Volkswagen ran a unique ad campaign to promote its newly launched fuel-efficient car. They hired the ad agency DDB Stockholm and transformed the standard staircase of the Stockholm metro station into a ‘piano staircase’ which produced musical sounds when stepped in. People responded to this environmentally friendly energy-saving ‘fun’ signal, although it meant more hard work. They started avoiding using the escalator adjacent to the piano stairway.

In India, the farmers are no different. During November 2022, the price of tomato in the retail market was hovering around Rs 20 a kilo. This meant that the small and marginal farmers who are the actual growers were not able to recoup the farming cost. As per an estimate by the Reserve Bank of India, the farmers in India do not even realize 50% of the retail price for major traded crops such as tomatoes. The bulk of what the final consumer pays is apportioned by the middleman and traders. The margin between what the farmers get and the consumers pay are hosts of other charges such as commissions, mandi (market) charges, Agricultural Produce Market Committee (APMC) memberships fees, weighing and assaying charges, loading and unloading charges, and transport charges. And all of these jack up the final price.

In 2021, the Central government responded to this cascading impact of the price rise by trying to repeal the farm law. The argument was if there are more markets where farmers can buy and sell their produce, it will lead to price discovery for the small and marginal farmers, and at the same time, the retail price will come down. India has around 260 million people living in poverty and 83% of them fall in the category of small and marginal farmers (with less than 2 hectares of landholding size).

If farmers are to sell their produce, they had two options. The first is to sell directly to the government. The Central government procures 23 essential food items from the farmers through its agencies such as the National Agricultural Cooperative Marketing Federation of India Limited (NAFED) at minimum support price (MSP) which is usually higher than the market price. From the perspective of tomato growers, this should sound like a good option. However, for a perishable non-standardized crop like tomatoes, it is difficult to administer MSP. Unlike rice and wheat which can be stored naturally, tomatoes need cold storage.

Even if the government agrees to procure tomatoes at the MSP, these government-procuring outlets are not uniformly distributed with almost 70% to 80% procurement of rice and wheat procurement done from Punjab, Haryana, Uttar Pradesh, and Andhra Pradesh. Interestingly, these are states where most of the cold storage units in India are concentrated.

The second option for the farmer is to take their produce to the nearby government-designated mandi where in front of state officers they can auction produce to the middlemen.

To do that they need to store their perishable stocks in cold storage. The predominantly tomato growing states such as Karnataka, Gujarat, Madhya Pradesh, etc., have relatively much less cold storage units.Even if the farmer is lucky to get access to cold storage, he needs to book a minimum quantity of 50,000 quintals for their produce, something not possible for a marginal farmer. Nearly 20% of India’s tomatoes are wasted because of storage problems.

The third option for the farmers is to directly take the produce to the local mandi. But given that there are only 7700 mandis as against 6,60,000 villages, means a farmer has to arrange for transport, which again may not be a feasible option given the distance and booking a 400 quintals capacity truck all for himself. In India, the average agriculture yield is 2070 kg/hectare, and the marginal farmers given their land holding size can at the most produce 24 quintals, and therefore booking a truck is not cost-efficient.

An easier way out is to sell to village-level aggregators. In fact, in most instances, these marginal farmers are so debt-ridden they are obliged to sell their produce to the village moneylenders. In India, only 15% of the marginal farmers get access to formal credit, and most of the time they depend upon informal sources, for buying seeds, fertilizers, and other farming requirements. The cost difference for loan rates between the formal and informal sectors varies between 30-45%, annually.

Finally, in the best possible scenario if the farmer is able to take his produce to the mandis, then also it does not help. The bargaining power of the farmer is low. Under APMC Act, state government officers are meant to oversee activities related to auctioning such as the commodities traded are homogenous in quality, and the markets are equipped with basic infrastructure for taking correct weights and for making payments. In reality, however, these middlemen form a cartel and at the time of auction offer a substantially lower price to the farmers.

The argument behind repealing the farm law was that the reform in the APMC Act will allow farmers and middlemen to trade in markets, in addition to the already existing mandis. So long it was the state governments that were in the business of regulating the mandis. If additional markets for trading are created the bargaining power of the middlemen is likely to fall and the farmers will benefit. It is to be noted, it was because of the pressure from the middleman and big traders (some of whom are also state-level party workers and politicians), the central government could not repeal the farm law.

The present rise in tomato prices is purely how the marginal farmers reacted to the not so ‘fun’ price ‘signal’ they faced during last November. When the realized price is abysmally low and with the risk of pre-monsoon rainfall playing a spoilsport, it is quite natural for them to grow some other weather-resistant crops such as millets, jowar, soyabean, something they did. The cause of the price rise in tomatoes can be attributed to a lower supply and market imperfection.

(IPA Service)

(The author is Professor, School of Management, Mahindra University).

The post The Real Story Of Rising Tomato Price And Plight Of Small Farmers first appeared on IPA Newspack.

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By Dr. Nilanjan Banik

As per the State of World Population Report published by the United Nations Population Fund, India will become the most populous country in the world in the summer of 2023. At this point, India also has a relatively ‘younger’ working-age population compared to China. Depending upon how one read the data, this can be a boon or bane, as labour is an important component of growth in national income (read, GDP). If the labourers are productive, then their income and the economy grow. Much of the GDP growth that occurred among the emerging Asian economies during the second half of the last century was through increased labour force participation. These countries, for example, China, South Korea, Singapore, Taiwan, and Vietnam, were able to absorb labour from the low-productive agricultural sector to the high-productive manufacturing sectors. Much of the supply of white goods like mobile phones, air conditioners, refrigerators, computers, etc. are manufactured in these countries, thereby making their economy transition from low to middle and high-income economies.

It is not surprising to see why there is a flourishing middle class in these economies as the manufacturing sectors were able to absorb labourers from the agriculture. According to pewresearch.org the share of Chinese who are in middle-income group jumped from 3% to 18%, however, the share of Indians middle-income group remain unchanged during most part of this century. Although, thanks to reforms and the consequential high growth rates in GDP, India was able to reduce poverty – from 40% in 2004 to 10% in 2019 – however, the drop in poverty merely resulted in an increase in the number of low-income population.

Data from the recently published India Consumer Economy 360 survey points towards a fall in income growth for the poor and middle-income households, whereas that of the high-income households surged. Between 2016 and 2021, people in the bottom 20 quintiles has seen their income growth decline by 20% whereas those in the top 20 quintiles has seen their income grow by 20%. The growth in income for this top 20 quintiles is because of highly skilled new-age workforce (often foreign returned) like doctors, legal experts, engineers and MBAs working for the global consultancy firms and global capability centres of multinational based in India.

Ergo, although in India the poor (less-skilled workers) are becoming richer, the society is also becoming more unequal, that is, the rich (highly-skilled workers and big entrepreneurs) are becoming richer much faster. New World Wealth, a Johannesburg-based company, published a report where it claimed that India is the second-most unequal country in the world, with millionaires controlling 54% of the wealth. In India number of ultra-high-net-worth-individuals (with net assets more than $30 million or more) has grown by 11% year-on-year in 2021, the highest percentage growth in the Asia-Pacific.

A reason for an unequal income distribution is that most of our labourers are stuck in low-productive sectors. According to the Periodic Labour Force Survey (PLFS) 2021-22, agriculture still remains the largest source of employment, employing 45.5% of the workforce. Construction is at a distant second employing 12.4%, closely followed by trade, hotel & restaurant, employing 12.1% of the workforce. Now all these sectors require low/semi-skilled labourers, with low productivity.

India’s labour productivity – economic output per hour of work – is just 12% of the US levels. In purchasing parity terms, GDP per hour worked is $70.68 for the US, in comparison to India’s $8.47, and this cannot be explained by differences in the working population alone. Types of employment, and access to finance and technology matter.

India leapfrogged into services without being able to create enough jobs in the manufacturing sector. Even the success story in the manufacturing sectors, like Reliance, Godrej, TATA Group, etc. employs a capital-intensive mode of production. For a long, everyone thought labour market reform such as giving more power to the companies to hire and fire workers, will bring in the required change. That did not happen in spite of the Central labour law reforms in 2020.

Instead, over the last five years, there has been an increase in self-employment in low-productive agriculture and urban informal sector. There are not enough jobs getting created and according to PLFS 2021-22, on the basis of current weekly status unemployment level remained stagnant at 8.8%, without declining much since 2017. On the other hand, a concomitant rise in income inequality is leading to the creation of low-paid and low-productive jobs such as housekeeping, security services, and other gig type jobs such as Zomato delivery boys.

A low productive workforce means a lower income, in particular when the informal labour markets are monopsonistics (higher number of labourers looking for jobs as opposed to employers/aggregators). There has been no significant growth of real wages at the all-India level in the last eight years. On the contrary, the cost of healthcare and education is rising, most of which have to be borne privately. As per the latest household social consumption data (NSS 75th Round), only 4% of the rural population and 19% of the urban population reported that they had health expenditure coverage.

According to the Economic Survey 2022-23, almost half of all medical expense is still borne by the patient themselves. The Government’s insurance coverage program Ayushman Bharat, does not cover primary healthcare such as prenatal care, and other common diseases such as influenza, diarrhoea, etc., which form a major part of household expense on health. Even for the tertiary sector, and if one is lucky to get covered under government insurance coverage, new medicines for terminal illness diseases and surgical procedures, remains outside the budget of a majority of the Indian household. For example, each round of chemotherapy and radiation costs more than one lakh, whereas a vital organ transplant (liver and kidney) can cost anywhere between 20 and 30 lakhs.

The same applies for availing quality education. At a time when public spending (Central and State governments taken together) is only 4.5% of GDP, it is not surprising that for a majority of the population, education is delivered by the private sector. Because of the failures of government schools to provide a decent education, studies show even the poor income household prefers sending their kids to private schools. However, sending kids to private schools cost money. As per a survey conducted by ET Online research, educating a child between the age of three to 17 years costs around 30 Lakhs; a 4-year BTech or a 3-year BSc, costs around Rs 4 – 20 lakhs; and a five and half years MBBS degree can cost up to 1 crore. No wonder the middle and lower-income households are getting squeezed in India.

For any growing economy like India, it is important to have a flourishing middle and lower-income household. Private consumption in India is almost 60% of the gross domestic product (GDP), and private consumption growth has accounted for 70% of Indian growth since 2000. And most of the private consumption is driven by middle and lower-income households. Low income households actually consumer goods manufactured by small and marginal enterprises which are labour intensive and generate employment. That’s an added advantage. This is contrary to the consumption pattern of the rich income household most part of which is conspicuous, encouraging imports.

For instance, during last year, sell of two wheelers (bike and scooters) have fallen, whereas, imports of premium goods such as scotch/whiskey, fancy cars, different kind of cheese, tangerines, raspberries, blueberries, dragon fruits, etc., went up by a considerable 26%. For keeping our economy resilient it is important that we ensure growth of income for the poor and the middle-income household. (IPA Service)

The author is Professor, School of Management, Mahindra University.

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By Dr. Nilanjan Banik

Recently, numerous articles have been written on the demise of the dollar. The argument is that China, the second largest economy after the US, is increasingly convincing the world’s largest suppliers of energy, including Russia, Saudi Arabia, Iran, and Venezuela to trade in Chinese Yuan. This, according to the commentators, will usher in the demise of the ‘petrodollar’; it would then be a matter of time before the US economy crumbles, they argue.

The term ‘petrodollar’ refers to the revenue earned in dollars by the oil-producing countries from the sale of oil, which was used to trade with other countries. In the early 1970s, during the Yom Kippur war, the Organisation of the Petroleum Exporting Countries (OPEC), of which Saudi Arabia is a member, implemented an oil embargo. The price of oil per barrel went up from $3 in 1973 to $12 in 1974, and the OPEC member countries earned dollops of money. The then American President, Richard Nixon struck a deal with Saudi Arabia ensuring that all oil deals across the world would take place in US dollars. Other oil producing nations in the OPEC joined Saudi Arabia, depositing a large portion of their money in the US banks, thus marking the beginning of ‘petrodollar’. In the world of flexible exchange rates, the US dollar became the most sought-after currency.

Fast forward, circa 2023, China and Russia are now trying to break this US hegemony. Other emerging market economies such as Brazil, India, Iran, and off late France, have now agreed to trade in their own currency. This come August 2023, BRICS (an economic grouping comprising Brazil, Russia, India, China and South Africa) is meeting in Durban, South Africa to discuss new global reserve assets instead of the US Dollar. Russia is already trading energy with India and China in Indian Rupee and Chinese Yuan, respectively. Saudi Aramco is building a $10 billion oil refinery in China (transaction happening in Chinese Yuan). France and China finalized the first ever deal on 65,000 tonnes of liquefied natural gas in Yuan.

Additionally, central banks around the world, in particular from China, Russia, India, and Turkey are stacking up gold reserves. As per World Gold Council (WGC), demand for gold went up by 18% in 2022, taking the world’s gold demand to 4741 tonnes, the highest for any year since 2011. That was the time of the US financial crisis. Central Banks were buying gold to hedge against an uncertain dollar. Even during the first quarter of 2023, figures suggest that this trend is continuing. Economies such as China, Russia, France, Japan, and UK have turned out to be net sellers of the US treasury notes, and buying gold.

The doomsayers feel that the immediate impact of shunting out the US dollar and replacing it with Yuan/or with any other currencies and assets such as gold can be drastic. The immediate impact is dollar losing values.

In fact, something similar happened during early part of 1970s. Prior to 1971, value of the US dollar was tied with the gold reserves. This meant that the dollar can exchanged for gold at a fixed rate. However, because of economic pressures such as inflation and the costs of running war in Viet Nam, the US government printed more money than what it had gold reserves to back it up. “Petrodollar” came as a respite and President Nixon abandoned the “gold standard”.

However, in spite of de-dollarization and new found love for gold in recent times, the US dollar and the economy are showing no sign of weakness. As per latest estimate from the International Monetary Fund (IMF), 59.8% of the global exchange reserves holding are still in US dollar. The distant second is Euro with 19.7% of global exchange reserves holding.  Japanese Yen with 5.3%, British Pound with 4.6%, and China with 2.8%, come next. 90% of the world trade happens in dollars. 90% of the world trade is happening is US dollar.

Interestingly, considering the last two years, Yuan continued to depreciate against dollar. Given that China and the US are each other’s largest trading partners; it is expected that a higher bout of inflation in the US will make the Yuan appreciate. According to the ‘law of one price’ if inflation in the US is higher than its trading partner, then the real exchange rate will reflect that – that is, dollar will depreciate against Yuan. However, this is not the case. Between 2021-Quarter 1 and 2023-Quarter 1, Yuan per US dollar depreciated from 6.45 to 6.87.

It means that there are other factors at play. For instance, productivity level in the US is still ahead that of China. The US chip embargo on China is a testimony to the fact that the US government want to keep its economy ahead of China. Although China during early part of 2000 were able to import technology by opening up its economy but it has a long way to go to catch up with the US. As per ILO estimates, China is producing an output of $7318 per worker much below the US standard which is $98,990 per worker.

There is no indication of the US GDP contracting. Latest figures suggest that the US economy grew by 3.2% and 2.6% in the last two quarters of 2022. Furthermore, the job market data (another metrics for gauging recession in the US) is looking strong. Unemployment rate of 3.6% is still below the natural rate of unemployment rate (NAIRU) which is at 4.6%. According to Fed Chair Jerome Powell there are 1.9 vacancies for every unemployed people.

The recent blip in the US banking sector (read, SVB and Signature bank crisis) had only made things work in the right direction. Investors and depositors are now shifting their money to large banks. Large banks with assets holding more than $250 billion are mandated to take the ‘stress tests’ (ability to withstand adverse economic conditions) conducted by the Fed, unlike SVB and Signature bank.

Then why this new found fad to give up dollars? The West and the US are increasingly moving away from fossil fuel. In fact, both the EU and the US are bringing in new regulations that will make it harder for emerging economies in Asia, Africa, and Latin America to trade with the EU and the US. Take for example, the Carbon Border Adjustment Mechanism in the EU and Inflation Reduction Act in the US, both of which are aimed towards aligning trade rules with climate change mitigation policies pursued by the developing countries. In fact, the Russia-Ukraine war has nudged the West to move towards adopting green energy. On the other hand, China alongside emerging economies in Latin America and Africa still continues to remain as a big market for fossil fuels, which oil producing nations cannot afford to neglect.

It is going to take a while before the Yuan can replace the Dollar. The US Dollar still enjoys dominance in terms of acceptability in the world capital market. Traders prefer dollars relative to Yuan, as the latter is more unstable. Many of China’s trading partners accuse Beijing of keeping the Yuan artificially devalued. Additionally, there is strict capital control in place that restricts the ability of businesses to move money in and out of China. This affects Yuan gaining traction as a global currency. In the best case scenario, given the supply chain that China has built in the Asian region, it may be possible for Yuan to dislodge Japanese Yen but not Dollar. (IPA Service)

The Author is Professor, School of Management, Mahindra University.

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By Dr. Nilanjan Banik

And the story goes on like this. There is this bank named Silicon Valley Bank (SVB) that lent money to the tech industries, and the start-ups primarily in the tech domain. During 10th March 2023, the news broke that this bank collapsed and did not have enough funds to pay back to its depositors. SVB was the biggest US lender to fail since the 2008 global financial crisis.

What happened? To know about the origin of the debacle we will have to step 3 years back. In March 2020, the world saw an outbreak of COVID-19. Economies around the world were not prepared to face this ‘exogenous’ shock, and the GDP growth collapsed. There is a prevalence of demand and supply-side shocks. Demand has fallen because of lack of jobs and loss in livelihood. Supply-side disruption happened as people stopped going out for work. Also, international trade got disrupted because of supply chain disruption, in particular from China. This meant cheaper imports also stopped coming.

The U.S. economy suffered one of the sharpest contractions in its history during 2020. To fight the fall in growth rate, the US government followed a massive expansionary fiscal policy. The US government pumped $1.5 trillion to save the economy during COVID times. The money pumped was almost half the size of the Indian economy currently estimated to be around $3 trillion.

The generous social security meant that the US workers did not have to work and money kept on coming to their bank accounts. Depending upon the States of stay, the US citizens were receiving anything between $600 -$900 per month from the government exchequer. And this was happening while the workers stayed back at home without any ‘real’ addition to the economic output. Demand remained intact with the help of social security whereas there was a gradual fall in real economic output. However, as the economy gradually started opening up starting early 2021, the economies across the world grew much faster than anyone expected. That mismatch between supply and demand drove up prices higher and higher, known as inflation.

Simultaneously between 2020 and 2022, commercial banks faced the problem of plenty. Banks were flushed with funds and SVB was no different. Moreover for the SVB bank, it was also getting back deposits from their cash rich tech clients (doing good business during the COVID time) and their deposits doubled.

Like any other commercial banks SVB wanted to lend out excess deposits. In fact, commercial banks operate on the principle of lending out their excess deposits to other depositors, firms/businesses, or even government agencies. The banks make money, as there is a difference between the bank lending rates which is higher than the deposit rates. For example if you put your money in the bank you get a fixed deposit rate of 6% which is lower than when taking loans from the banks. The caveat is that the business that the banks lend money to do not go kaput and/or the assets where the banks invest, say for instance, government bonds or gold or commodities do not lose value.

In the case of SVB, the management thought about playing safe and they in turn parked almost three-quarters of the incremental in demand deposit that occurred between 2020 and 2022, in well rated US treasury bonds and other secured debt market instruments. Although considered safe but the problem was SVB used it short-term deposits and invested in long-term low-yield securities. The thought process was that the US Treasury bill is the safest asset and yield to the US bonds during 2021 was quite low meaning that the bond prices (value of the assets) were high. So it is a good deal as even if they want to liquidate bonds they would realize good money.

What the SVB management could have never foreseen is that the quantitative easing of $1.5 trillion dollars will within a matter of two years drive US inflation to forty years high. The US inflation breached 9 percentage marks reaching a high of 9.1% in July 2022, against the FED control limit of 2 percentage points.

The US FED started fighting this inflation though a bit late: in an attempt to do so increased the FED rate too fast and too high. The one year US treasury rate increased almost 500% from 1% during COVID times to almost 5% level in early March 2023. This meant the value of the bonds that SVB was holding in its portfolio fell, and SVB stock crashed almost 60% in a single day last Friday. The bank lost $1.75 billion in a single day.

The case of SVB is that of a systematic (market) risk. SVB and many other banks like Silvergate and Signature banks, played safe by parking excess deposits in government securities. When bond yields went up all of these banks made losses. These banks were now paying 5% for their deposits whereas getting a yield return of 2% which was showing losses in their account.

Also, once the economy came out of COVID-19, profitability of the tech firms started falling. Corporations across the world came out from the on-line to off-line mode, which meant less use of data. Profitability of tech firms fell. This led to big tech companies, including Meta, Google, and Microsoft laying off thousands of workers. Therefore, SVB also started losing money from their clients, which were primarily tech firms.

Before the world could fathom the SVB crisis, soon there was news that Credit Suisse (CS), one of the largest investment banks in Europe, was also taking a hit. Now the case of CS falling is a classic example of unsystematic risk or credit risk.

CS lost money because of lending out to a series of businesses that went bad because of accounting fraud and investing in high risk assets – a classic example of credit/unsystematic risk. During the last three years, CS lost money because two of their biggest clients, hedge funds companies, namely, Archegos and York Capital Management, lost close to $5 billion. Earlier, the bank lost close to $10 billion lending to an invoice discounting firm named Greensill Capital, UK; and another $1 billion lending to Wirecard AG, Germany. Losing money because of bad investment has nothing to do with the Central Banks across the world following a quantitative tightening policy.

Moral of the story, economics always operates with both hands. And as the present case suggests at times both the hands can go wrong. (IPA Service)

(The author is Professor, Mahindra University).

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By Dr. Nilanjan Banik

February 24, 2023 marks the one-year anniversary of the Russia-Ukraine war. What seems to be a fight between David and Goliath is still continuing. The Russian armed force has the world’s largest stockpile of nuclear weapons, the second largest fleet of ballistic missiles, and almost five times more military personnel in comparison to Ukraine. By any estimation the battle was never going to be a fair fight, but with ‘foreign’ support.  the US and its allies   Ukraine continued    fighting.

The military might of the Russians was challenged by the economic might of the US, the EU, Japan, and Australia; with strings of economic sanctions directed toward the Russian economy. Around $300 billion of Russia’s gold and foreign exchange reserves are frozen by sanctions. The embargo on Russian oil by the US and its allies is still continuing. Russian access to the SWIFT financial transaction processing system is stopped. Multinationals such as McDonald’s, KFC, Adidas, British American Tobacco, etc., have closed down their operation in Russia. The US and its allies thought Russia would crumble economically. The Russian economy with a market size (read, GDP) of around $2 trillion is minuscule in comparison to the US and its allies, with a combined market size in excess of $30 trillion. Much like what one would have thought the Ukrainian army caving in militarily, Russians are showing no sign either, economically.

In fact, there are signs of the Russian economy performing better. As per estimates by the International Monetary Fund, Russia is expected to grow by 2.1% in 2024, in comparison to 1% for the US, 1.6% for the Euro Area (27 countries), and 0.9% for Japan. The other big economies such as China and India, which have not imposed any sanctions and continue to buy oil from Russia, are expected to grow at 4.5% and 6.8%, respectively. In fact, companies of Chinese and Indian origins, such as ANT group, China Communications Construction Company, JSW Steel, State Bank of India, etc., continue to do and expand business in Russia. Besides China and India, the Russian continues to trade aggressively with countries in Africa and Latin America.

The sanctions by the West seem to have a little impact on Russia. It is therefore no surprise to see that the Russian rouble appreciated the most during the month of June last year, hitting 52.3 to the dollar, strongest since May 2015. Inflation is also moderated. The annual inflation rate in Russia fell to 11.9% in December 2022 from 12% in the previous month. Inflation is slowing for the eighth consecutive month and reached its lowest since February 2022, when the war started.

Meanwhile, in the Euro region the growth rate is plummeting, jobs are hard to come by, and inflation rates are going through the roof. As of December 2022, inflation rate in the EU region is 10.4%; with some countries such as Latvia, Lithuania, Hungary, Estonia, Czechoslovakia, Estonia, and Poland, witnessing inflation rates in excess of 15%. Before start of the war, almost 40% of the total energy demand in Europe (especially natural gas) was met by the Russians. Sanctions on Russia have affected the supply of natural gas and oil. And a substitute for it is the pricier US energy (both natural gas and gasoline), which means Europe has to shell out more. This means an aggravating budget deficit for the European governments.

A higher budget deficit can be sustained only if the economy is growing. However, economic growth is continuously falling in the eurozone. Government debt as a percentage of GDP rose from 83.8% in 2019 to 96.4% in 2022. Higher energy and food prices because of the war are likely to push the deficit higher by another 2%.

Two other factors are going against Europe. First is the climate change. Extreme heatwave, drought and flooding in part of Europe last year has seen lower crop harvests and higher prices. As per report of the UK Environmental agency, harvests of onion, sugar beet, apple, and hops, are expected to fall by between 10% and 50%. Second is the lack of demographic dividend. To maintain a stable population mix, on an average every woman should give birth to 2.1 children, assuming the average death rate applicable to the world population. In contrast, the same is much lower for some economies in the eurozone — 1.38 children per woman in Greece, 1.39 in Spain, 1.41 in Italy, and 1.94 in the UK. This has shifted the demographic balance towards elderly population. An elderly population usually depends upon social security and pension benefits, and do not contribute productively to the economy.

With a lesser number of younger skilled populations available to contribute productively, the government is going to realize fewer amounts through tax. Moreover slower GDP growth, war, and higher energy prices, are making it difficult to increase tax realization in the Euro zone region. The government has less money to spend on doles and pensions, and therefore need to borrow increasing the budget deficit.

Elsewhere, in the US, inflation is showing no sign of retreat. The inflation number hit a historic high of 9.1% in June 2022, the highest recorded during last 40 years. It is presently around 6.5% which is much higher than the FED target of 2%. And this is in spite of repeated rate hikes by the Federal Reserve. The higher allocation of money in the defence sector, and spending money in the war in Ukraine meant the US government is spending money too fast without any commensurate increase in economic output. For the fiscal 2023, the defence budget is increased to $857 billion that constituted more than a third of the total budget allotted for the economy. Moreover defence manufacturers are known for lobbying and funding political parties, most part of which is inflationary.

On the other hand, rate hike and inflation in the US and Europe has led to a fall in the real wage rates. This has led to an increase in labor agitations – train workers in France and the UK, energy sector workers in Norway, and aviation workers in various budget airlines in the US. A tightening monetary policy and continuation of war is going to see many more such labor agitations.

Russia can survive this war economically thanks to China and India. What seems to be a zero-sum game for Europe is proving to be a positive-sum game for Russia, China, and India. What seems to be a war of ideology – democracy versus autonomy – is proving to be a pricy matter for the Western allies. (IPA Service)

(The author is Professor, Mahindra University).

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By Dr. Nilanjan Banik

2022 was a good ‘growth’ year for India. India’s economy was among the fastest growing large economies. This was commendable, especially in a year marred by war and extreme climate events, rising commodity and energy prices, tightening global monetary policy, and slower global economic growth. India is poised to grow at 6.9 per cent in 2023, as per the estimate by World Bank. However, India’s Achilles heel is its burgeoning current account deficit (CAD), falling value of the Indian rupee, falling industrial growth and high domestic inflation numbers. Let’s first examine the negatives, and then the positives, as we go into the New Year.

During the second quarter of this fiscal, India’s CAD widened to $23.9 billion, the highest since 2012. Rupee touched a record low of 83.07 against the dollar in October 2022. Retail inflation hovered at over 7 per cent (against the upper tolerance limit of 6 per cent) for most part of this year. A bulk of India’s exports, for example, refined petroleum products, pearls, precious stones and chemicals are not picking up. Weak global demand implies a lower demand for these income-sensitive items.

A strong Indian economy demands more energy and fossil fuels, most of which are imported. As imports continued to grow, without a commensurate increase in exports, the rupee depreciated. A depreciating rupee also leads to domestic inflation, as the ‘imported’ commodity and energy prices which are used for domestic manufacturing and services become costly.

It will be difficult to sustain a GDP growth of 6.9 per cent without ensuring healthy domestic demand. For instance, in November India’s industrial production shrank 4 per cent from a year earlier in October 2022, the steepest pace of contraction since August 2020. Real wage growth in the agriculture and construction sectors is stagnating. This is a cause of concern as marginal propensity to consume for lower-income groups is higher in comparison to the upper 10th percentile of population. Most of the consumption for the rich and wealthy are on imported merchandise and services items which do not contribute to domestic demand. Lack of domestic demand coupled with higher energy and input price will send a negative signal to the manufacturers against possible capacity expansion. Government should find ways through programmes such as MGNREGA to boost domestic demand.

However, it must be said that the Centre and the Reserve Bank of India (RBI) are making coordinated efforts to make exports competitive, lower domestic inflation, and arrest a fall in the rupee value.

To reduce dependence on foreign imports and increase export competitiveness, the GoI launched programmes such as the National Manufacturing Policy in 2011.Additionally, several policies; such as the Focus Market Scheme (FMS) and Production Linked Incentives (PLI) were launched. The PLI scheme was meant for increasing competitiveness of 14 items under manufacturing sectors such as pharmaceuticals engineering, and electronics.

To lower trade and logistics costs related to the movement of goods, the Centre increased outlay on capital expenditure from Rs 5.54 lakh crore in 2021-22, to Rs 7.50 lakh crore in 2022-23. Such allocation of funds is expected to provide impetus to the Gati Shakti project, a plan to improve multimodal connectivity.

Some positive results are emerging so far India’s exports are concerned. In the case of high-value-added pharmaceutical exports such as formulation and vaccines, India is performing well because of FDI and government’s support in the form of various schemes such as FMS and PLI. Foreign smartphone manufacturers are showing interest to invest in India. Export of electrical and telecom equipments are showing an uptick.

In the short run, policymakers undertook a few micro measures to reduce the widening CAD. For instance, India is buying oil from Russia. The share of Russian mineral fuel imports in India’s trade basket went up from 1 per cent in February 2022 to 22 per cent by November 2022. On September 9, 2022, India banned export of 100 per cent broken rice, an input for producing ethanol, an alternative source of fuel. India increased customs tariffs on gold imports from 7.5 per cent to 12.5 per cent. Gold is another item responsible for increasing trade deficit.

The rupee has also fallen on account of monetary tightening in the US. Since March 2022, the US Federal Reserve has raised interest rates by 350 basis points. A hawkish policy stance has led to a rise in returns of the US treasury security. The yield on two-year US treasury security increased from 1.56 per cent on August 1, 2020, to 4.50 per cent on December 9, 2022. This has led to outflow of capital from the Indian economy, pulling down the rupee. Since March 2022, this year, RBI increased the policy rates by 225 basis points.

In addition to raising the repo rates, the RBI took a few other policy measures. For example, RBI giving permission to commercial banks to open Foreign Currency Non-Resident (FCNR) accounts (held in foreign currency) and Non-Resident External (NRE) deposits from Indians residing outside India without any cap on interest rates. This is likely to increase deposits of foreign currencies. RBI is also contemplating about listing Indian government bonds in the JP Morgan Emerging Markets Government Bond Index and FTSE Emerging Markets Government Bond Index. This when done, will ease the inflow of foreign currency, improving foreign exchange reserves and curtailing a fall in the value of the rupee.

The combination of fiscal and monetary policy initiatives has begun to show results. Foreign exchange reserves increased from $528.37 billion in October 2022, to $564.07 billion in December 2022.

Net foreign direct investment rose to $22.7 billion in April-October 2022 up from $21.3 billion during the corresponding period last year. Foreign portfolio investment contributed to inflow of $11.8 billion between June and early December, reversing negative trends of the past. Although the rupee has depreciated up to 9.8 per cent this calendar year, it was less when compared to other developed countries in the EU regions, Japan, and South Korea, where exchange rates depreciated in excess of 15 per cent. Remittances from abroad also started looking good, estimated to reach $100 billion in 2022, up from $81 billion in 2021.

According to the World Bank data, there is a structural shift in remittances from largely low-skilled workers in the Gulf Cooperation Council Countries to remittances from high-skilled workers in the UK, US, Australia, and Singapore. Only events, such as another war in the Asia Pacific region, or a newer fatal variation of COVID hitting the world, can derail India’s growth process.

Make in India, Atmanirbhar Bharat and PLI schemes will take time to make exports competitive. Meanwhile, Indian negotiators should find ways to deal with extra-trade provisions such as labour, environment, IPRs etc., which are increasingly hurting access to India’s exports in the developed markets. (IPA Service)

The writer is Professor, School of Management, Mahindra University

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By Dr. Nilanjan Banik

Trade numbers for the fiscal 2022-2023 are looking dismal. The expectation is that for the Q1 and Q2 Fiscal 2022-2023, the Current Account Deficit (CAD) is expected to be the highest in 9 years. A quick search on items using the harmonized system (HS) at a 2-digit level reveals that there are 6 such items (among the top ten tradable items), which are of intra-industry types and contribute more than 70% of India’s trade deficit. Controlling CAD would call for understanding the nature of the deficit and policy response to counter this growing deficit.

These 6 items of interest are Mineral Fuels, Oils, and Bituminous Substances (HS Code 27); Natural or Cultured Pearls, Semiprecious Stones, Diamonds, and Gold (HS Code 71); Electrical Machinery and Equipment, Sound Recorders, and TV (HS Code 85); Nuclear Reactor Boilers, Machinery and Mechanical Equipment (HS Code 84); Organic Chemicals (HS Code 29); and Iron and Steel (HS Code 72). All of these items are income-elastic, that is, the imports are likely to increase when any economy is growing. India is one of the fastest growing large economies, with GDP projected to grow around 7% this fiscal year. Therefore, it is not surprising that India will need more mineral fuels, such as coal, petroleum and natural gas to sustain growth.

Among these six major commodities, items falling under mineral fuels (HS Code 27) stands out. Over the last four years, on average mineral fuel items were contributing around US$ 93,313 million, annually, to CAD. However, during the current fiscal, in the first quarter alone, it contributed to denting India’s CAD by US$ 68,031 million. This sudden rise in import bills on account of mineral fuels has to do with a stronger US dollar (that is, a depreciating rupee) and a rise in the price of crude oil in the international market. For instance, oil prices went up from around US$ 87 a barrel in January 2022, to around US$118 in June 2022. Additionally, starting this year the value of the Indian rupee depreciated by more than 7%; breaching a historic low of Rs 82 to a dollar.

The share of mineral fuel items in India’s total imports is around 38% whereas its share in India’s total exports is around 22%. India mainly imports crude oil and thermal coal. Corporate conglomerates such as Reliance then convert imported crude oil into refined petroleum products such as motor gasoline., diesel fuels, liquified petroleum gas, etc., which are meant for domestic consumption and exports. A growing economy means more demand for transport and energy (met primarily by thermal coal imports).

Apart from mineral fuels, another product category that has contributed most to the rising CAD is Natural or Cultured Pearls, Semiprecious Stones, Diamonds, and Gold (HS Code 71). The category, namely, pearl, diamonds, and semiprecious stones suffered because of Russia-Ukraine war. Due to a shortage in supply of rough diamonds and semiprecious stones from Russia, India had to import similar items from high-cost supplying countries in Africa. Like in the case of mineral fuels, India imports rough diamonds and semiprecious stones, polishes and designs them into jewelry, and thereafter re-export.

The case for gold is a little different. Over the last ten years, during 2021, India witnessed the largest amount of gold imports. Most part of the gold imported is meant for domestic consumption, with a little element of intra-industry trade.

Two other items, namely, Organic Chemicals (HS Code 29) and Iron and Steel (HS Code 72), contributed sporadically to CAD. Take for instance, Organic Chemicals. During COVID times, India was dependent heavily on raw materials or Active Pharmaceutical Imports (APIs) used for manufacturing medicines, from China. The percentage share of API imports from China increased from a tiny 1% in 1991 to 70% in 2020. Organic chemicals also find usage in the making of Personnel Protective Equipment kits and other dyes used during COVID times. Although India is a leading exporter of generic drugs, the difference in the trade balance was stark with the start of the pandemic.

The case with increment in Iron and Steel imports can be attributed to India’s commitment to building more physical infrastructure in the form of roads, land ports, sea ports, and airports. It is to be noted, in the budgetary allocation for the fiscal 2022-2023, Finance Minister Sitharaman increased capital expenditure to Rs 7.5 lakh crore, from the last year’s Rs 5.5 lakh crore. This led to recent spike where India is consuming more Iron and Steel domestically, with little left for exports.

The trend for the remaining two sectors, namely, Electrical Machinery and Equipment, Sound Recorders, and TV (HS Code 85); and Nuclear Reactor Boilers, Machinery and Mechanical Equipment (HS Code 84) is not much of an alarming trend.

To reduce dependence on foreign imports, the government of India launched programmes such as the National Manufacturing Policy in 2011. Subsequently, schemes like Make in India (2014) and the Atmanirbhar Bharat Abhiyan (2020) were also launched. Additionally, several instruments were introduced. Schemes such as Focus Market Scheme (FMS) and Production Linked Incentive (PLI) were launched. Under FMS, the government is providing incentives on exports that can be used later to settle against future import duties on raw material to be used for exports. PLIs were given in the form of tax rebates, import and export duty concessions, and easier land-acquisition terms such as a cut in the land-registration tax. The idea is to enable foreign and domestic firms to invest in greenfield and brownfield projects.

While the impact of PLI schemes are yet to be tested, policymakers are fire fighting to stave off growing CAD. For instance, India continues to buy cheap oil from Russia. Additionally, India restricted export of 100% broken rice. The idea is to use broken rice for producing ethanol, an alternative source of fuel. On 1 July, the government increased customs tariffs on gold imports from 7.5% to 12.5%.  To facilitate technology transfer from developed countries, foreign direct investment (FDI) in the pharma and medical-equipment sectors has been allowed up to 100% through the automatic route.

The move has already proved beneficial to some sectors. In the case of high-value-added pharmaceutical exports such as formulation and vaccines, India is doing well. The PLI scheme has seen foreign smartphone manufacturers such as Foxconn, Wistron, Nokia, Coral Telecom, to name a few, showing interest in investing in India. This is likely to enhance competitiveness and productivity growth for the Indian manufacturing firms and rein in control on the CAD. (IPA Service)

(The author is Professor, School of Management, Mahindra University).

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