Indo-US trade deal: some preliminary thoughts

It's a trade deal, not an agreement. The broad contours have been agreed between PM Modi and President Trump. Now the details have to be filled in.

Trump made a number of claims in his post on Truth Social:

• India will stop buying Russian oil
• American exports to India will be subject to zero tariffs and there will be no non-tariff barriers
• India will buy $500 bn of American goods

None of the above appears likely.

India will scale down purchases of Russian oil but will not scrap oil purchases altogether- the relationship with Russia is too deep and too valuable for India to attempt such a radical step.

Zero tariffs on all American exports are also a pipe-dream. Some exports, particularly agricultural exports, will face tariffs. No government will survive if it allows agricultural products to come in freely.

India imports about $40 bn worth of goods and $83 bn of goods plus services, so $500 bn appears way out- unless spread out over several years. Even if India steps up oil and defence purchases, $500 bn appears distant.

The tariff of 18 per cent is slightly lower than that for competitors such as Vietnam but that in itself is not going to confer great advantage. All trade is linked to FDI- and unless US FDI rises considerably, we are not going to see any great increase in Indian exports.

But for India the deal is not really about pushing exports. Overall exports have not suffered in FY 26- despite US tariffs, exports are 4.4 per cent up over the previous year. Indian exports to the US in the aggregate have not suffered either, thanks to electronic and pharma exports that are not subject to tariffs. Gems and jewellery, apparel have taken some hit, though, but these sectors have not suffered as much as feared, partly because of support from the government to cushion the impact of Trump tariffs.

For India, the deal is about capital flows, FDI and FII and the impact on the rupee. The rupee has bounced back from Rs 92.04 to around Rs 90.28 after the deal was announced. The deal certainly brings stability to the rupee. 

The deal is also about the overall strategic relationship with the US, including defence supplies and an understanding on containing China in the Indo-Pacific. We do not wish to be an ally of the US but nor do we wish to be seen as a foe. Commentators have noted that trust will take a long, long time to restore but the trade deal is a good start. 

How Kevin Warsh got selected

I had a post yesterday on Kevin Warsh, the new appointee for Fed Chairman. 

By way of post-script, I want to write about the process followed for his selection. What I write is gleaned from various reports in the media. 

Warsh missed out on the job nine years ago when Trump gave it to Jerome Powell instead. According to reports in the media, Trump thought Warsh looked far too young to be taken seriously.

Soon after getting elected, Trump considered Warsh for the job of Treasury Secretary, a job that was given to Scott Bessent later.

For the Fed Chairman role, Bessent drew up a list of about ten candidates. After talking to them, he reduced the short-list to four. He had detailed meetings with the four where he asked them to spell out their views on interest rates, among other matters. The President then met all the four candidates. There was one more meeting between Warsh and Trump last Thursday after which Trump decided to go ahead with the appointment.

In this entire period, all names under consideration were in the public domain. Their views and comments on a range of matters were dissected and parsed in the media. The financial markets' reaction to some of the names could be discerned. For the short-listed four, betting markets sprang up. There were reactions on Capitol Hill to some of the prominent names, such as Kevin Hassett.

Hassett's chances dimmed after the Department of Justice announced an investigation of Jerome Powell's spending on the renovation of the Fed. Angry members of the Congress made it clear they would not process Hassett's appointment until Powell's case had been settled.

To cut a long story short, the selection of the Fed Chair took place in the full glare of publicity with the reactions of the markets and prominent public figures getting factored into the final selection. We have a pretty good idea of what we might expect of various candidates. And the process doesn't quite end there. The President's nominee has to be confirmed by US Congress. He will be grilled on his views and his record closely examined. It is a process that deserves admiration.

Quite different from some name being sprung on the public one day, would you say? 

What do we make of Kevin Warsh, Trump nominee for Fed chief?

Give credit where it's due. President Trump's appointee as Fed chief, Kevin Warsh, is exceptional talent- and he is nobody's stooge. Trump seems to have made a good call. 

Warsh is relatively young (55). At 35, he was the youngest member ever of the Fed Board of Governors when appointed to it in 2006. With his Kennedyesque looks, he may well be the most handsome Chair of the Fed in its history.

Warsh lacks the heavyweight academic credentials of Alan Greenspan, Ben Bernanke and Janet Allen, all three PhDs in Economics and the latter two big names in academia. He got his BA in public policy and then a JD in Law from Harvard. His background is similar to that of Jerome Powell's (BA in political science plus law). 

But that's precisely the striking thing about him- how many people with BAs get on to the board of a central bank and especially the Fed at 35? Prior to that he worked at the middle level in the M&A department of Morgan Stanley and then briefly in the Bush administration. It says something about the man's calibre that, with this fairly light experience, he could vault on to the board of the Fed. 

Warsh proved his mettle during the 2008 financial crisis when he served as a conduit to Wall Street, given his numerous contacts.  According to Ben Bernanke, his experience and insights helped contributed to the crisis-fighting strategy  of the Fed.   

Bernanke notes his contribution to the financial reform efforts that followed the crisis. He led a committee that conceptualised 'macroprudential regulation'. Bernanke writes:

"In late 2008, amid the crisis firefighting, we at the Fed began working on our own proposals for financial reform. I wanted to have a well formulated position before the legislative debates went into high gear. Kevin Warsh led a committee of Board members and Reserve Bank presidents that laid out some key principles. Kevin's committee considered a more explicitly 'macroprudential' or system-wide, approach to supervision and regulation. Historically, financial oversight had been almost entirely 'microprudential' – focused on the safety and soundness of individual firms, on the theory that if you take care of the trees, the forest will take care of itself. In contrast, the macroprudential approach strives for a forest-and-trees perspective." (Wikipedia)

Warsh disagreed vehemently with the Fed's persisting with Quantitative Easing beyond a point. His basic point was that the it went well beyond the remit of the Fed. That is a position he holds to this day. He warned- incorrectly, as it turned out- about inflation during the financial crisis and he expressed his opposition to QE2 while voting for it out of respect for Bernanke. Think of it- a BA arguing with a prospective Nobel Laureate on a topic on which the latter had made his reputation, banking crises! That shows confidence and it shows class.

Warsh left the Fed in 2011. He has since straddled the worlds of academic and financial markets. He's a Distinguished Visiting Fellow at the Hoover Institution and a lecturer at Stanford Business School, a testament to the fact that he's taken seriously in academic circles. In 2017, he was a contender for Fed Chairman. Trump eventually opted for Powell, partly because he thought that Warsh was too young and looked too young to be taken seriously as Fed chief! It was a decision that Trump came to regret- and that he has now set right.

Warsh has moved from hawk on inflation during the financial crisis years to a relative dove in recent years. He backs Trump's instinct for cutting interest rates and he thinks the Fed has underestimated the productivity boost to the US economy emanating from AI. His detractors see his shift as opportunistic but many grant that Warsh is not somebody who takes the independence of the Fed lightly. If he did, Trump may not have chosen him. Criticise Trump as much as you likes but he understands that without a credible and competent Fed, he cannot get the economy to perform. That's why he overlooked a couple of candidates who were perceived as excessively deferential to him.

Warsh favours a 'regime change' at the Fed. He wants the Fed get its balance right- he thinks at the moment its size is too big and its interest rates too high. Warsh would move to shed a big chunk of its portfolio. That would cause interest rates to rise. The Fed can then move to cut its policy rate with vigour. He has Trump's backing but he will need to carry his colleagues with him.

Call me an optimist but I can see Warsh at the helm of the Fed providing the right to support to Trump as he attempts a major reset of the US economy. 

Trump is right, the US economy is booming

 At Davos, President Trump said:

Growth is exploding, productivity is surging, investment is soaring, incomes are rising, inflation has been defeated. We are the hottest country anywhere in the world.

His remarks drew jeers from his detractors. 

Well, Trump's right.

In Q4, US gdp growth is projected at 5.4 per cent, according to the Atlanta Federal Reserve. Jason Furman, Harvard Professor and former Chairman of the President's Council of Economic Advisors is quoted as saying:

“Most advanced economies would be thrilled to have the US growth numbers." 

Which is more or less what Trump said at Davos. 

We have the IMF's revised forecasts for the world economy and the US. 

The world economy is projected to grow at 3.3 per cent in 2025, a shade below the growth rate of 3.4 per cent in 2024. US gdp will grow at 2.1 per cent, higher than the 1.8 per cent forecast last April (although below the unusual growth rate of 2.8 per cent in 2024).

Here's the juicy part: global growth and US growth are not one-off things in the face of tariffs- it's not that advance stocking by importers, implementation of tariffs late in the calendar year and absorbing of costs by importers have cushioned growth for one year. 

In 2026, global growth will again be 3.3 per cent and the US economy is projected to accelerate to 2.4 per cent (according to Goldman Sachs, to 2.8 per cent).

So, the doomsayers have been proved wrong for now about the impact of Trump tariffs- neither the world economy nor the US economy is collapsing. As Gillian Tett, FT commentator, puts it:

When Trump unleashed policy “rupture” a year ago, it sparked gloomy economic predictions. However, as the president crowed at Davos, the American economy is booming in 2026, due to a mixture of monetary, fiscal and regulatory stimulus.

Economist freaks out on India

Is India back in flavour- with the western media, if not with foreign investors? The Economist has as  many as four articles on India in its online edition- two on PM Modi, one on the Indian economy and a review of the book on the Indian economy by Arvind Subramaniam and Devesh Kapur. The tone is extremely favourable.

The title of the piece on the economy is telling: Rising giant- The Ascent of India's economy. The Economist lauds India's gdp growth of 7.4 per cent in a year in which it has been hit by a 50 per cent tariff on exports to US. The paper ascribes India's performance to three factors: luck, macroeconomic policy and structural reform.

India has been lucky to have had a second year of good monsoons which have boosted agricultural output and caused food prices to fall by 2.7 per cent in the past year. A low inflation deflation has boosted real gdp growth. Macroeconomic policy includes fiscal consolidation, a reduction in the Goods and Services tax and cuts in interest rates. Structural reforms comprise the reduction in labour codes from 29 to 4, financial regulation overhaul, removal of the cap of 100 per cent FDI on insurance and opening up of  nuclear power to the private sector. The government has signed three trade agreements: Britain, Oman and New Zealand. The Economist gives credit to Trump for spurring India's reforms.

The Economist says adversity has caused PM Modi to focus even more on economic reform and growth. It urges more reforms, some of the "big bang" sort that many economists have urged over the years but which the government has rightly eschewed:

The recent reforms are not enough. Some merely correct recent errors. Although India’s average tariff rate is drifting down, it is still higher than it was when Mr Modi first won power in 2014. Much-needed reforms to agriculture are still locked in a box marked “too hard”. So are changes to make it easier for companies to acquire land. India’s awful schools continue to waste hundreds of millions of young minds. Smog and traffic jams steal some of the boost India could gain from urbanisation. Unforced errors remain common: this month India’s Supreme Court alarmed foreign investors with a ruling that has thrown into confusion what tax they must pay on capital gains. 

Foreign commentators must understand that India will reform in its own way, with due regard for popular sentiment-  and this is an approach that has worked. 

Globalisation has failed the world- US Commerce Secretary

You have to credit the Trump administration with one thing: straight talk. Mr Trump gives the lead in this respect- no mincing of words, no beating about the bush, calling a spade a spade.

In an astonishingly candid article in FT, US Commerce Secretary Howard Lutnick makes it plain that, in the view of the Trump administration, globalisation has failed the US and it has, perhaps, failed the world. Buying goods from wherever these are cheapest, moving production to the lowest cost places in the world, growing through the services economy while neglecting manufacturing- the US has no appetite for any of these.

Some of our past leaders believed the lies that offshoring was necessary, borders were not, and our national interest needed to submit to global lower cost of labour for the common good. That approach failed the US, crushed American workers and ripped apart most of the rest of the world as well. It destroyed industries, weakened supply chains and left working people in most western countries behind.

America has turned protectionist in the past year and Lutnick thinks it's paying off:

One year in and the results have been historic. Our exports are up, our imports down, our trade deficit is down by 35 per cent and our budget deficit dramatically lower. Our GDP growth is driven by record investment in the US economy. Our strong 4.3 per cent GDP numbers didn’t appear by coincidence. They are the direct result of America First policies that prioritise US production, resilience and workers.

Lutnick could not have been more blunt. 

But does that not mean that the mantra of globalisation preached to nations such as India for the past several decades was phoney? That nations prosper not by leaving things to firms and markets but through active intervention by governments to promote domestic production through subsidies, incentives and protectionist walls? That self-reliance or what is now called atmanirbharta is central to economic success? 

India turned protectionist in 2018- thereafter, average tariffs started rising. Liberalisers criticised this as anti-reform. They need to check with the US Commerce Secretary. 

Will 2026 be worse for the world economy?

 Gita Gopinath, Harvard prof and former Deputy MD of IMF, thinks it will.

She gives her reasoning:

So why hasn’t the world felt the sting of tariffs yet? The answer lies partly in actual tariffs being around half of what the US announced thanks to numerous exemptions. Yet at 14 per cent this remains a sharp escalation, the consequences of which had two offsets. First, AI spending and the stock market surge powered by AI optimism have propped up US growth and buoyed economies like Taiwan and South Korea that export AI-related goods. Second, fiscal policy has been more expansionary, not only in the US, but even more so in Germany and China. These forces masked the drag from American tariffs and Chinese retaliation. They also made 2025 look far more stable than it actually was. 

These favourable factors will not operate in 2026, she says. The AI boom is not sustainable. Importers cannot absorb 95 per cent of the higher costs, as they did in 2025. China cannot continue with its export-led strategy. The EU needs deep reforms that aren't happening.

Well, we'll see. Current inflation forecasts do not show a marked increase in inflation in the US for 2026. Stock market valuations for AI companies may get corrected but investment in AI is proceeding apace, particularly on the part of tech companies with large hoards of cash. China has diversified its exports away from the US and is growing exports to low-income countries at a much higher rate than before.

The thing is that many economists and commentators don't like the Trump administration. They want it to fail with its economic policy reset which includes protectionism, Buy American, Hire American etc. They disapprove of the massive fiscal deficit implied by Trump's Big Beautiful Bill for taxes passed last year.

It's not just that the real economy was not impacted as badly as experts had forecast- Gopinath's explanations may hold for the  real economy. But what about financial markets which are said to be forward looking? They should be factoring in the implications for next year and the years ahead? 

The aren't. Neither the US stock market nor the US bond market reacted anywhere as harshly as the commentators had forecast in 2025. Okay, stock market valuations may be influenced by AI stocks. But why have bond market yields hardly budged? 

2026 could be the year of reckoning for the experts and not President Trump!