Economists have been wrong about Trump's tariffs- so far

I had a post a few days ago about the Economist saying that the US economy is defying gloom. I had a post with my own analysis earlier in which I had argued that Trump was winning the tariff war- on X, the article evoked harsh comments and I was branded a Trump admirer. 

When economists say the US economy will crash or the world economy will crash on account of Trump's tariffs, it is no more than wishful thinking, I'm afraid. They don't like Trump for a variety of reasons  and they would like to see the economy crashing. Well, it ain't happening. The facts on the ground are otherwise.

The Economist acknowledges that six months into Trump's term, things look "surprisingly rosy":

Yet six months on the full reckoning has not arrived. There is no runaway inflation. America’s economy grew by 3.8% at an annualised rate in the second quarter; the Atlanta branch of the Federal Reserve expects similar in the third. Consumers are spending, firms investing and the stockmarket booming. The outlook has also improved elsewhere. In September the OECD lifted its forecast for global growth to 3.2%, up from 2.9% three months earlier.

And it proceeds to explain why:

One reason is that tariffs have been gentler than advertised. In April America’s average rate was estimated to be near 30%; today the same models put it closer to 18%. Mr Trump threatened China with tariffs of 145% but by September was imposing levies at barely a third of that. South Korea’s fell from a promised 25% to 15%. ....

....Carve-outs have blunted the impact further still. Nearly half of America’s imports have been exempted from Mr Trump’s tariffs. Electronics such as smartphones and computers were spared entirely. Brazil’s rate of 50% includes nearly 700 exemptions, trimming it to 30% or so. Canada’s headline tariff of 35% is nearer 6% in practice, according to Scotiabank, a local lender, largely because goods qualifying under the United States-Mexico-Canada Agreement (USMCA) are exempt. Even sectoral levies are riddled with loopholes. Mr Trump’s new pharmaceutical tariffs, announced at 100% and due to take effect on October 1st, excluded generics (which make up 90% of drugs sold in America) and branded firms with investment plans in the country. That day he paused the measures altogether as talks began.

There are other reasons. Firms rushed to front-load imports to beat the tariffs. There seems to be underinvoicing of imports from China; as a result, tariffs paid are much lower for the actual value of goods imported.

Most importantly, trade wars, such as those that erupted after the Smoot-Hawley, have been noticeably absent. Except for China, no country has retailiated seriously against American tariffs. The reason is that many countries find they can diversify exports. America accounts for only 8 per cent of world imports today compared to 20 per cent at the turn of the century. Countries are forging closer trade partnerships with like-minded countries so that there is a large area of free trade after excluding the US. 

The Economist thinks that with Trump spreading the roll-out of tariffs over several quarters, inflation in the US could become persistent. Well, the last month data shows a monthly inflation rate of 0.2 per cent of an annual rate of 2.4 per cent. 

I repeat what I said earlier: Trump is winning for now. 

RBI's deregulatory moves raise concerns

The RBI did not announce any rate cut at its MPC meeting earlier this month. Instead, the governor uneashed a wave of deregulatory measures.

The government has constituted committees to examine the entire gamut of regulations and see how regulations that weigh heavily on businesses and individuals can be axed. The committees are looking at non-financial regulations. Financial regulations, one presumes, will be looked at by the concerned regulators. The RBI has made a start.

Nobody doubts that Indian businesses are hamstrung by a whole slew of regulations, a large number of which need to go. I would argue, however, that banking regulations are a different cup of tea and need to be handled with care. Some of the deregulatory measures announced by the RBI earlier this month do give rise to concerns.

More in my BS column, Deregulation is the flavour of the season

FINGER ON THE PULSE
Deregulation: The flavour of the moment

T T Ram Mohan

In a year in which India has been hit with additional tariffs of 50 per cent on exports to the United States, you would not have expected India’s gross domestic product (GDP) growth projection to be revised upwards from 6.5 per cent in April to 6.8 per cent in October. Or the inflation rate to be revised downwards from 4.0 per cent to 2.6 per cent.

Yet, that is what the Reserve Bank of India (RBI) did in its latest monetary policy statement earlier this month. The tariffs will indeed impact growth. However, since they kicked in from September, the impact will be felt in the third and fourth quarters. The RBI’s downward revisions for these two quarters indicate the impact will be extremely modest. For the year as a whole, the impact of tariffs in the second half of the year is overshadowed by GDP growth of 7.8 per cent in the first quarter of FY26, which was a good 100 basis points (bps) above expectations

Commentators have been crying gloom and doom for the Indian economy ever since Donald Trump’s announcement of reciprocal tariffs on “Liberation Day”, April 2. Little of that has materialised in all these months. Analysts were projecting India’s GDP for FY26 to be shaved by around 50 bps, from 6.5 per cent to 6 per cent or below. The RBI believes nothing of the sort is on the cards.

But then the Indian economy has a habit of delivering pleasant surprises in recent years. In FY23, a year in which the Ukraine conflict erupted and unfolded in a big way, India’s GDP grew at 7.6 per cent when analysts were unsure if growth of even 6.5 per cent was possible. In FY24, GDP growth shot up further to 9.2 per cent, a number that defied all forecasts by a wide margin.  

These outcomes cannot be said to be accidental. They are the result of sound macroeconomic policies, regulation, and governance. The economy has become resilient in the face of serious challenges.

What we are faced with at the moment is uncertainty. We do not know exactly how the tariffs will unfold, where they will settle, or when. Geopolitical shocks have thus far not spiralled out of control but nobody can bet on that. The answer is not “big bang” reforms, dramatic measures that exacerbate uncertainty in the present while promising returns in the distant future. Instead, the focus must be on reducing uncertainty in the present while creating a more enabling environment for economic agents.  The government is right in moving deregulation to the top of its agenda, even as it maintains the momentum of public investment. 

That also appears to be the thinking behind the stance of the RBI in its latest monetary policy statement. With inflation at a record low, there seemed to be little risk in cutting the policy rate. The RBI resisted the temptation to do so. With a projected growth rate of 6.8 per cent in a challenging environment, there is not much upside to be had from cutting the policy rate at this point. Better to conserve ammunition for when the growth rate threatens to sag. 

The RBI has instead announced deregulatory measures that are intended to boost credit growth at banks. Bank non-food credit has grown at 10.2 per cent over the previous year, down from 13 per cent in the year before. It is driven mostly by growth in consumer loans (11.8 per cent). Loan growth to industry is a disappointing 6.5 per cent and it is propped up by growth in loans to micro, small and medium enterprises (18.5 per cent), once regarded as a problem area by banks. Growth in loans to large corporations is a mere 1.8 per cent

The RBI says that industry is taken care of by funds from non-bank sources. In 2025-26, the total flow of resources from non-bank sources to the commercial sector increased by ₹2.66 trillion, more than offsetting the decline in non-food bank credit by ₹0.48 trillion.  One does not know why the RBI is coy about providing the figures for the flow of funds from different sources (banks, non-banks, external commercial borrowings, internal resources, etc), as it used to in the past. 

The deregulatory measures are about growing banks’ loan business at the expense of competing sources. The big deregulatory move is allowing banks to fund mergers and acquisitions (M&As). This is long-term funding that entails asset-liability mismatches. It also requires care in judging valuations of M&As. The RBI might  have allowed such financing for the better-rated banks to start with and then extended it to the lower-rated banks. 

Another deregulatory move is the removal of the framework that disincentivised lending to corporations with bank credit exposure of over Rs 10,000 crore. The RBI argues that the Large Exposure Framework suffices to manage risk at the bank level. The issue of lending to highly leveraged corporations, however, does not go away. As we all know, banks lent merrily to a high-profile, highly leveraged group. It required the shock effect of an equity research report for the group to bring its leverage down to more sensible levels. 

The RBI says it will address concentration risk through macro-prudential tools if necessary. Presumably, it does not see a problem of high leverage at corporations at the moment. Nevertheless, there is merit in specifying higher risk weights for bank loans to corporations with debt-to-equity ratio above a certain level (instead of specifying an absolute value of credit exposure). A third regulatory move- a proposal to license new urban cooperative banks- is truly mystifying. 

The deregulatory measures will boost credit growth and bank income but will not boost economic growth because, for the most part, they substitute non-bank credit with bank credit. It is not clear that low rates of credit growth are a serious problem for banks at the moment. Return on assets of scheduled commercial banks was a healthy 1.4 per cent in March 2025; for public sector banks, it was 1.1 per cent. Besides, banks continue to face the problem of deposit growth lagging credit growth: Deposits grew at 9.5 per cent in the last year while credit grew at over 10 per cent. Boosting credit growth without getting a handle on deposit growth is not a great idea. 

Deregulation in the economy in general is a good thing.  There is always a case for visiting regulations that have outlived their rationale and cramp business activity. In banking, however, it is wise to make haste slowly with deregulatory initiatives. Bank governance and risk management still have a long way to go. It makes sense to conserve the hard

Turbulence in the Tata group

For some reason I have not been able to fathom, some of the best reporting on the Indian economy and Indian corporates happens in the foreign media.

The Indian media has flagged the board-level disputes in the group and the fact that the government has stepped in to arrange a resolution. But it hasn't quite spelt out what the issues are. FT's report yesterday does that.

i. Operational issues: The Air India plane crash in Ahmedabad last year was bad publicity. Then came the cyber attacks on JLR in the UK and the involvement of TCS, which manages JLR's technology backbone. TCS also was at the cetnre of the cyber attack on Marks and Spencer as it happens to be the service provider. Then, the job layoffs- estimated at 12,000- have spelt controversy. 

Analysts are asking whether top management has a grip over the sprawling empire.

ii. In-fighting in the board of Tata Trusts which ultimately controls the group: Noel Tata, chairman, could not succeed in getting an extension for Tata Trusts member Vijay Singh, former defence secretary. It appears Noel Tata has also not been successful in engineering an exit for the Shaporji Pallonji group at Tata Sons in which Pallonji owns 18 per cent.

iii. Listing of Tata Sons: The RBI thinks Tata Sons is an NBFC and wanted it to list by September. Tata Sons is resisting the move apparently because it doesn't want greater scrutiny of itself and also doesn't want to cede control. 

We do not know what the government has conveyed to the group. 

How Trump shook up NATO in his first term as President

Jens Stoltenberg was Nato  secretary-general during Trump 1. The Guardian carries an excerpt from his forthcoming account of his time as Nato chief. It's a terrific read. It brings alive Trump's interactions with European leaders during his first term and how he read the riot act to them on stepping up their contributions to Nato- I didn't know the US contributed 80-90 per cent of Nato's budget!

In May 2017, Trump visited the Nato headquarters. It was a new building that he was to inaugurate. He didn't approve of the expenditure at all:

“Do you really need such a big headquarters?” he asked. “What do you need all these people for?”

I replied that while the organisation itself isn’t that large, member states’ delegations also use the building – it makes it easy to meet with security measures in place, and everyone uses the same cafeteria. I told Trump who had designed the headquarters: architects Skidmore, Owings & Merrill, who also designed the Trump International Hotel & Tower in Chicago.

“I know those people. They’re extremely expensive,” Trump exclaimed. “I don’t understand why you chose those expensive architects. Extremely expensive!”

Later in 2018, Stoltenberg spoke over the phone. Again, Trump did some plain speaking:

Trump had recently met with Merkel, too, and told her things simply couldn’t carry on the way they were. “I said, ‘Angela, you have to cough up. You need to spend 2%.’ She said, ‘Maybe in 2030’ – and she laughed as she said it … She laughed!”

He said the United States was spending 4% of GDP on defence, and covered 80-90% of Nato’s expenses. “And we’re not doing it any more. We’re gonna pay what Germany pays.”

By the end of the call there was no mistaking Trump’s warning: “Look, if we leave, we leave. You need Nato, desperately. We don’t need Nato.”

Trump doesn't believe the US needs Nato; it is the Europeans who need it. And if they need it badly, they had better pay for it. Well, Trump has had the last laugh. Many Nato allies have met the 2 per cent target and the fresh target that Trump has set is 5 per cent.