Indo-US trade deal: India's problem is not the current account but the capital account

Much of the analysis of the Indo-US trade deal centres on what India has gained or lost in terms of trade. But the point about the deal is not that it improves our export prospects while opening up selectively to American goods. 

It is that the deal improves the prospects for capital inflows, FDI and FII. These inflows have been distinctly unsatisfactory consequent to the US's imposing additional tariff of 50 per cent on Indian exports (barring a few specified items).

Foreign investors do not view favourably any emerging market towards which the US administration is ill disposed. That would have meant a downward pressure on the rupee indefinitely. Any further fall in the rupee had the potential to destabilise the Indian growth story. The rupee exchange rate rising to around Rs 90 from Rs 92 or so before the deal was announced is an indicator of how the attitude of the US towards India matters.

More in my BS article, Indo- US trade deal is not just about trade

Indo-US trade deal is not just about trade

The deal shifts the US posture towards India from hostile to neutral, and that matters for growth

T T Ram Mohan

The India-US trade deal, for which a framework for an interim agreement has been agreed, will not lack critics. The Congress party has called it a surrender. A farmers’ organisation has called for protests. Many will pore over the fine print once the details are finalised and argue that the deal is more favourable to the United States.

We need to be clear about a couple of things.

First, any nation negotiating a trade deal with the Trump administration must expect the deal to be tipped in favour of the US. President Donald Trump has made it clear that his priority is to reset America’s economic equations with the rest of the world. He is determined to use the economic and military might of the US to do so.  

For the entire post-War period until recently, the US was happy to let the advantage lie with many of its trade partners. It believed that it was economically strong enough to do so. Sharing prosperity with partners, the US believed, would make for world peace and it would also keep the world safe from communism. 

Not any more. Mr Trump rode to power in 2016 by insisting that the time had come to reorder trade relationships to the benefit of the US.  He didn’t quite manage to do so, partly because his initiatives were scuttled by Washington establishment status quoists in his Cabinet. In his second term, Mr Trump is determined not to make that mistake.  He has filled his administration with loyalists who will faithfully execute his orders. 

Last July, Mr Trump reiterated his perception of where matters stand. He said in a post, “The United States of America has been ripped off on TRADE (and MILITARY!), by friend and foe, alike, for DECADES. It has come at a cost of TRILLIONS OF DOLLARS, and it is just not sustainable any longer - And never was!” In any trade deal, therefore, it will be Advantage US.

Second, we must be clear that the overall relationship with the US is contingent on arriving at a trade deal that America approves. Not doing a trade deal means courting US hostility across the board. In negotiating a trade deal with the US, every nation faces a choice: Does it want the US to be a friend or a foe? 

Mr Trump’s trade deal with the European Union is an excellent illustration of the two points made above. For the EU, the issue was not just access to the vast American market. It was also American support to Europe in the Ukraine conflict, including the supply of critical weaponry and intelligence and America’s involvement in the North Atlantic Treaty Organization (Nato) itself. Faced with the prospect of jeopardising its defence relationship with the US, the EU settled for terms that were widely seen as humiliating.

The EU now faces a baseline 15 per cent tariff on its exports to the US. In addition, steel, aluminium and copper exports from the EU will face a 50 per cent tariff. Car exports would be subject to a quota.  The EU has also agreed to buy an additional $750 billion in US energy products over the next three years and make investments worth $600 billion in the US by 2029. The EU, for its part, will eliminate tariffs on imports of all US industrial goods and provide preferential access to a wide range of US seafood and agricultural products.  A more abject surrender is hard to visualise. Mr Trump has likewise signed deals with the UK, Japan and South Korea — all close allies of the US —that are conspicuously one-sided.  

The lesson for India is that the Indo-US trade deal is not just about access to the US market. India has weathered Mr Trump’s 50 per cent tariff on Indian exports much better than expected. India’s total exports are up 4.4 per cent year on year despite Trump’s tariffs. Nor have exports to the US suffered — they are up 9.8 per cent in April-December 2025.

The problem for India is that capital flows are flagging. This is happening at a time when India’s current account deficit of 1.3 per cent of gross domestic product (GDP) compares favourably with that of a range of countries, including Canada, the United Kingdom and Australia, as the latest Economic Survey notes. India had no difficulty financing current account deficits of a much higher magnitude in the post-reform era. Today, we are hard-pressed for capital inflows, and the rupee is under pressure despite a highly favourable set of economic indicators. That is not something to be treated lightly.

Gross foreign direct investment (FDI) fell marginally by 2 per cent in calendar year 2024. This may be in line with the general decline in FDI flows in recent years but it does not help us at all. At the same time, outward FDI from India as well as repatriation of profits by foreign firms in India have increased sharply. As a result, net FDI in April-November 2025 was a mere $5.6 billion. The bigger problem at the moment is with foreign portfolio inflows (FPI). It was (-)$3.9 billion in April-December 2026.  

There could be many reasons why FPI inflows have turned negative. You can be pretty sure, however, that the orientation of the US administration towards India is an important factor. When India is subject to a punitive tariff regime by the US, fund managers are unlikely to view India as a good place to invest in. The Treasury department houses individuals, including the Treasury Secretary, with strong links to Wall Street. They are known to work the phone lines with fund managers on a range of matters. 

Absent a trade deal, therefore,  we must reckon with rough weather in respect of capital flows, however good our macroeconomic indicators. (Using the future tense, as in the original version, because the deal is not finalised yet- TTR . And who knows, services exports to the US will not be subject  to punitive action as well? Also at risk are  defence collaboration, technology transfers and the entire strategic partnership that has been built over the past two decades. Thus, India’s strong economic performance in the present year is  no assurance that it can be sustained in the absence of an Indo-US trade deal. 

The point about the Indo-US trade deal is not that it involves compromises, such as cutting back on oil imports from Russia or scaling up imports of goods from the US to $100 billion annually for the next five years. It is also not just about getting a tariff rate of 18 per cent, one that is lower than that of many of our competitors. The substantive point is that it moves the US posture towards India from hostile to neutral. That is good news for the Indian economy.

 

Marco Rubio at Munich: the West versus the rest?

US Secretary of State Marco Rubio's impassioned speech at the Munich security conference a few days ago lays out very clearly what the US thinks is wrong with the world and how it thinks it should be set right.

Rubio highlighted the three principal mistakes the West made in the post- War era.

First mistake: free trade

.....we embraced a dogmatic vision of free and unfettered trade, even as some nations protected their economies and subsidized their companies to systematically undercut ours – shuttering our plants, resulting in large parts of our societies being deindustrialized, shipping millions of working and middle-class jobs overseas, and handing control of our critical supply chains to both adversaries and rivals. 

Second mistake: climate change thesis

To appease a climate cult, we have imposed energy policies on ourselves that are impoverishing our people, even as our competitors exploit oil and coal and natural gas and anything else – not just to power their economies, but to use as leverage against our own. 

Third mistake: opening the doors to immigration:

And in a pursuit of a world without borders, we opened our doors to an unprecedented wave of mass migration that threatens the cohesion of our societies, the continuity of our culture, and the future of our people. 

How to set the world right? Europe must follow America's lead in asserting the primacy of Western civilisation over the rest of the world. The centuries of colonialism before the WW2 were the era of Western greatness and it's time for the West to put aside the post-WW2 order in order to reclaim that dominance:

For five centuries, before the end of the Second World War, the West had been expanding – its missionaries, its pilgrims, its soldiers, its explorers pouring out from its shores to cross oceans, settle new continents, build vast empires extending out across the globe. 

But in 1945, for the first time since the age of Columbus, it was contracting.  Europe was in ruins.  Half of it lived behind an Iron Curtain and the rest looked like it would soon follow.  The great Western empires had entered into terminal decline, accelerated by godless communist revolutions and by anti-colonial uprisings that would transform the world and drape the red hammer and sickle across vast swaths of the map in the years to come. 

Against that backdrop, then, as now, many came to believe that the West’s age of dominance had come to an end and that our future was destined to be a faint and feeble echo of our past.  But together, our predecessors recognized that decline was a choice, and it was a choice they refused to make.  This is what we did together once before, and this is what President Trump and the United States want to do again now, together with you. 

The troubling question for Europe is what the new colonial enterprise means for them. In the old days of colonialism, Europe called the shots. The partnership that Rubio now advocates is one in  which the US will hold the upper hand. As we have seen, all trade agreements the US has signed so far are tipped in favour of the US. And the US  expects Europe to defer to the US in matters that the US thinks are vital to itself, such as Greenland.

Many Europeans may well think that this order, unlike the earlier colonial era, is one in which they are at the receiving end of colonialism! 

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!  

 

 

Anti-Indian rhetoric hits US firms

American firms are beginning to feel the impact of the anti-Indian rhetoric now current in the Maga community, says an FT report. 

FedEx CEO, Raj Subramaniam, faces charges of laying off  American workers and replacing them with lower-cost Indian workers. Walmart, Verizon and Dish Network are among the other companies targeted by those who believe the H 1-B visa has been misused to let in low-cost Indian workers. There is also a clamour to kick out Green Card holders of Indian origin.

The rise to prominence of Indians in the American corporate world is clearly evoking a backlash. Indians are also prominent in educational institutions: an estimated 60 or more schools have Indians as dean. At HBS and Stern School, Indian succeeded Indian as dean. The hard work and success of Indians in the US, once touted as a tribute to American society, is beginning to now working to the detriment of the Indian community.

Unfortunately, negativity towards Indians in the US seems to be spilling over into US policy stance towards India. 

Experts got it wrong in 2025!

My latest piece in BS on some of the great misses of forecasters in 2025. Which, of course, means you have take the forecasts for 2026 with more than the proverbial pinch of salt.

Pundits stumbled badly in 2025

A New Year has begun. With it come forecasts for what we might expect this year. We need to view these forecasts with more than ordinary scepticism. 

Forecasters, in general, have a terrible record; in 2025, they stumbled badly in multiple areas. Just look at what the pundits —economists, military analysts, foreign policy experts and others —predicted during the year or what they failed to foresee. What follows is a limited sample.

Trump’s tariffs and US economic growth

Last April, the International Monetary Fund (IMF) forecast growth of 1.8 per cent for the United States’ gross domestic product (GDP) in 2025 and 1.6 per cent in 2026, down from 2.8 per cent in 2024. Last October, it revised its forecasts to 2.0 per cent and 2.1 per cent, respectively. As everybody now acknowledges, the apocalypse that was forecast for the US ain’t happening.

 Economists are now trying to explain away their misses. The increase in tariffs has not been as high as feared earlier — as though an increase in the weighted average tariff from just under 3 per cent to around 17 per cent is not bad enough. Exporters frontloaded their exports to the US —surely, this should have been anticipated and built into forecasts? The artificial intelligence (AI) boom has obscured weaknesses in the economy —well, US GDP growth of 4.3 per cent in the third quarter of 2025 was driven by consumer spending and exports, not business investment. 

 The real shocker for economists is that the setbacks to the US economy as a result of Donald Trump’s tariffs don’t seem to be materialising in 2026 either, going by current forecasts. Goldman Sachs forecasts US GDP growth of 2.8 per cent for 2026!

India’s GDP growth in FY26

President Trump announced his Liberation Day tariffs last April, with a “reciprocal tariff” of 25 per cent on India. In August, he slapped an additional 25 per cent punitive tariff in response to India’s imports of oil from Russia. Last April, the Reserve Bank of India revised its gdp growth forecast for FY26 downwards to 6.5 per cent from the 6.7 per cent forecast earlier. Following the punitive tariff of August 2025, some private agencies said India’s GDP growth could fall below 6 per cent.

Nobody could have imagined that in a year in which Indian exports to the US faced tariffs of over 50 per cent for more than half the financial year, India’s GDP growth would be 7.4 per cent, higher than the previous year’s 6.5 per cent. Now, many agencies see growth momentum being maintained in FY27 at 7-7.5 per cent. 

Note that no economist or agency had given India any chance of attaining growth of over 7 per cent over a four- or five-year period without it meeting the well-known laundry list of reforms: A fiscal deficit close to 3.3 per cent, privatisation, speedier land acquisition, an overhaul of agricultural laws, hire and fire on a much bigger scale than even the latest labour Codes promise, among others. 

Anti-Indian sentiment in the US

When Mr Trump won the elections in 2024, it was assumed that the India- US relationship would move to an even higher trajectory. The way the relationship has unfolded since has come as a shock to the establishment.   

Pundits used to say that, whatever the equations between the two governments at any point, the people-to-people relationship between India and the US was an underlying positive. That no longer seems true. It appears that that anti-India sentiment in the Trump administration is an aspect of a wider anti-Indian sentiment in the Maga (Make America Great Again) community.  

Several elements have contributed to the souring of sentiments towards Indians.  The misuse of H-1B visas intended for highly skilled persons to ferret out low-cost labour is one factor. The very success of Indians in different walks of life is another: On social media, Americans ask whether the US needs Indians to head corporations such as Microsoft, Google and IBM; and whether a Vivek Ramaswamy is American enough to run for high office Non-resident Indians flaunting their religiosity has evoked angry responses: An 85-foot statue of Hanuman in Texas, the noisy celebrations of Indian festivals in prominent suburbs, etc.  No pundit saw the negativity towards India or the Indian community in the US coming.

Pakistan’s resurgence on the international stage

Pakistan was in the doghouse when Mr Trump returned to office last January. Its resurgence in the world of diplomacy in 2025 was truly remarkable.  

 Following the Pahalgam massacre and the Indo-Pak skirmish of last May, Pakistan did not quite draw any international condemnation. On the contrary, it used the skirmish to restore itself in Mr Trump’s favour by, among other things, repeatedly giving Mr Trump credit for bringing the hostilities to an end. Thereafter, Pakistan’s army chief, General Asam Munir, was welcomed twice to the White House, perhaps a unique first for any serving general. 

In late 2025, the US approved a $686 million package for Pakistan for maintenance of F-16 aircraft sustainment and upgrades of F-16 aircraft. Pakistan also signed a mutual defence pact with Saudi Arabia, something that could not have happened without Washington’s blessings. Pakistan’s Prime Minister Shehbaz Sharif claims with some justification that Pakistan is on good terms with three major powers, namely, China, Russia and the US. The turnaround in Pakistan’s international standing has left foreign policy experts bewildered.

Israel’s dominance of West Asia 

 On October 7, 2023, Hamas launched a surprise attack on Israel. A brutal response from Israel followed. In late 2024, Israel extended its operations in a bigger way in Lebanon. Commentators warned that Hezbollah was not Hamas; it had more than 100,000 missiles at its disposal and had the capacity to raze Israel’s cities. PM Benjamin Netanyahu was leading Israel towards disaster. 

 What the pundits did not know was that Israel had accumulated intelligence on Hezbollah hideouts for its personnel as well as its missiles. Israel proceeded to decapitate the Hezbollah leadership and decimate 80 per cent of Hezbollah’s missile capabilities. The militia is today a pale shadow of its former self. 

 In December 2024, a new front opened in Syria with a rebel outfit moving to topple the Assad regime in days, with the help of Israel and Türkiye. Last June, Israel and the US attacked and substantially incapacitated Iran’s nuclear facilities. Pundits, who had warned that Israel’s PM Netanyahu had over-extended himself, had to eat their words. Israel’s dominance of West Asia increased in 2025. 

There is no dearth of forecasts for 2026. The Epstein files will prove Mr Trump’s undoing (perhaps already proved wrong). Venezuela will turn out to be Mr Trump’s quagmire (looking dicey even now). The Republican Party will lose badly in this year’s US polls, the AI bubble will burst, the full effect of tariffs on inflation in the US will be felt in 2026 (hmmm).  

In Intellectuals, a lengthy diatribe against the cerebral types, historian Paul Johnson writes, “A dozen people picked at random on the street are at least as likely to offer sensible views on moral and political matters as a cross-section of the intelligentsia…. beware intellectuals.” For “intellectuals” one might well substitute “experts”.

 

                   

US third quarter growth stumps analysts

 The US economy grew at 4.3 per cent in the third quarter on top of the 3.8 per cent growth in the second quarter.

And no, it's not fuelled entirely by AI investment. Consumer spending and exports contributed significantly to the surge. Nevertheless, the index of consumer confidence tracked by the Conference Board is at its lowest since President Trump announced his Liberation Day tariffs! 

Let the pundits figure out whether the gdp growth data is misleading or whether the consumer confidence index is flawed. President Trump is entitled to his moment of exulting:

The TARIFFS are responsible for the GREAT USA Economic Numbers JUST ANNOUNCED…AND THEY WILL ONLY GET BETTER!

India's ambitious plans for its navy

I have said this before: very often, you have to look to western media for serious news about India.

FT has a fascinating story on how India's plans to beef up the navy to cope with China's expansion in the Indian ocean.

The statistics are impressive. About  66 per cent of the world's oil supply of 50 per cent of container traffic passes. An estimated 95 per cent of India's own trade happens via the Indian Ocean. For China, 95 per cent of its $6 trillion trade is sea borne and most of its passes through the Indian Ocean.

India wants a powerful navy that will safeguard its maritime interests and act as a powerful level in the event of tensions with China.

Thus far, India has fallen behind on plans for the navy:

Few things capture India’s sluggish modernisation of its navy better than its vacillating plan to build up its submarine fleet. In 1999 New Delhi laid out a blueprint for building 24 new submarines over 30 years, to add to its existing fleet.  But 25 years later, only six have been built, meaning India has less than half the planned number of new conventional submarines. It has two nuclear ballistic submarines, though two more are under construction, and last year it decided to build two nuclear attack submarines, and will lease one from Russia. Of the 17 conventional submarines, 11 are over 25 years old.   

It is now making up for lost time:

India has 55 ships under construction at an approximate cost of Rs1tn ($11bn). The navy has got the government’s nod to build another 64 and hopes to get a third aircraft carrier — the second to be built within the country — but has not got a green light from the government yet. 

There is now way India can match China's naval capability: China boasts of some 250 ships at the moment and is still building frantically.

India's naval strategy, the article indicates, hinges on a few key elements.

First, China can deploy only 35 per cent of its naval assets in the Indian Ocean, so India needs to have only 1 ship for every three that China has. Secondly, India will use airbases in Mauritius and Seychelles as a counterweight to China. Thirdly, India is fortifying its position in the Nicobar islands which is close to the Malacca Straits through which 80 per cent of China's sea traffic passes.

Experts are clear about one thing. The Indian navy will strictly defend Indian interest, it will not be drawn into the conflicts of others, such as a confrontation between China and the West over Taiwan.

A paradigm shift in US economic policy in 2025

 

America’s economic policy changed in four ways in 2025.

·    -  The Trump administration effectively ended the free trade regime

·      - It revamped immigration policy to make it far more restrictive

·      -   It withdrew from the Paris Agreement on climate change

·     -    It passed a tax bill that ensures that America’s public debt remains at a high level in the foreseeable future, if not at a record level

To me, the astonishing thing is that these dramatic shifts have failed thus far to unsettle the world economy or the financial markets. Analysts have been coming up with numerous explanations for why this is so- after predicting economic apocalypse.

In 2025, we will know who was right: Mr Trump or the pundits.

More in my article in Business Standard.

 

Four US economic policy shifts of 2025 

 

In 2025, the world saw one tectonic shift in US economic policy and at least three others that are consequential. These shifts will not be easy to reverse even if there is a change in administration in the United States (US) down the road. How exactly they will impact the US and the world is unclear at the moment. What is clear is that the rest of the world will have to adjust to them.

First, the tectonic shift. The US under President Donald Trump has decisively upended the free trade regime that has underpinned the world economy for decades.  The world has to live with a US base tariff level of 10 per cent plus an element that will vary from country to country and from time to time, depending on how the US perceives its trade relationship with that country. 

This will be reinforced by even higher tariffs for sectors, such as steel and aluminium, which are perceived to be of strategic importance to the US economy. The weighted average tariff under President Trump has risen from below 3 per cent to around 19 per cent.

 During the year, major nations settled for deals with the US that are hopelessly one-sided. The European Union (EU), for instance, faces a tariff of 15 per cent (with higher tariffs on steel and aluminium) while US exports to the US EU face zero tariff. For the privilege of doing business with the US, the EU has committed to spending an additional $750 billion on US energy products (over three years), investing $600 billion in America, and buying US military equipment worth “hundreds of billions of dollars”. 

Japan too will face a baseline tariff of 15 per cent and will invest $550 billion in the US. The United Kingdom gets away with a tariff of 10 per cent because of the “special relationship” with the US.  China has secured a one-year truce with the US that allows tariffs to settle at a staggering 47 per cent for one year. In return, China has agreed to lift restrictions on export of rare earths to the US and buy more soyabean from the US. 

Switzerland was hit with a tariff of 39 per cent. Its President rushed to the US to negotiate a lower tariff but was rebuffed. Two months later, the US agreed to reduce tariffs to 15 per cent in return for $200 billion investment from the Swiss. India’s refusal to be rushed into a trade deal looks very brave in comparison with the abject surrender of nations that are incomparably richer.

The second shift has to do with immigration policy. The US administration has clamped down on border crossings, deported thousands of illegal immigrants, paused asylum applications, and attempted to limit birthright citizenship. 

Kevin Hassett, one of Mr Trump’s economic advisers and now a frontrunner for the post of Chairman of the Federal Reserve, has argued that the issue is the quality of immigration. He notes that the United States admits only 12 per cent of its immigrants on the basis of employment and skills, whereas 63 per cent of those admitted by Canada and 68 per cent of those admitted by Australia are selected for the skills they bring to these countries.

Mr Trump himself has lately spoken of the importance of H1B visas and foreign students in US universities. But the National Security Strategy document released by the White House recently makes the basic stance clear: “The era of mass migration is over”. There will be no retreat from the view that migration strains domestic resources, undermines social cohesion and threatens national security. 

A third shift is the Trump administration’s rejection of climate change and green energy as priorities. One of Mr Trump’s first acts after taking over as President in January 2025 was to withdraw from the Paris Agreement that committed all signatories to time-bound emission reduction plans. Mr Trump often calls climate change a “hoax” or a “con job”, renewable energy a “joke” and talks of “clean, beautiful coal”. 

The Trump administration is actively working to dismantle subsidies for renewable energy and electric vehicles, instead opening up more land and waters for oil drilling — “drill, baby, drill” is the motto.  The National Security Strategy document declares emphatically, “We reject the disastrous ‘climate change’ and ‘Net Zero’ ideologies that have so greatly harmed Europe, threaten the United States, and subsidize our adversaries.”

Mr Trump’s actions will mean higher costs for the rest of the world in battling climate change. It will also mean fewer resources with which to battle it as the Trump administration axes billions of dollars that support climate change projects. It could result in other nations withdrawing from the Paris Agreement as they view the burdens imposed on them as unfair.

A fourth shift is the rise in the level of public debt in the US as well as in other advanced countries. Public debt in the US and other advanced countries has risen relentlessly since the global financial crisis of 2007, and had averaged 104 per cent of gross domestic product (GDP) even before the pandemic struck in 2020. Mr Trump passed his Big Beautiful Bill that retained the tax cuts of Trump-1 and boosted defence expenditure. The International Monetary Fund projects US government debt to rise from 122 per cent of GDP in 2024 to 143 per cent by 2030. The corresponding figures for advanced economy debt are 109 per cent and 119 per cent, respectively.  

Commentators worry that rising public debt in advanced countries poses a threat to macroeconomic instability in the global economy. Mr Trump’s economic advisors, however, believe that faster economic growth, tariff revenues and lower interest rates will cause government debt to fall to 94 per cent by 2034. That is one forecast that will be watched closely. But clearly, the dogma about the unsustainability of high levels of public debt that advanced countries preached to the developing world has gone out of the window.

As the year draws to a close, the astonishing thing is that these massive shifts in economic policy have thus far failed to seriously unsettle the US economy or the world economy or the financial markets. The IMF projects growth in the world economy for 2025 at 3.2 per cent, just 20 basis points below last year’s. The US will grow at 2 per cent, compared to 2.8 per cent last year. US inflation is running at 2.8 per cent, which is way below what was feared following Mr Trump’s Liberation Day announcements. 

The US equity market touched an all-time high during the year, with a return of 13 per cent over the year. The yield on the one-year G-Sec in the US is a full 50 basis points below its level when Mr Trump assumed office. Pundits, who predicted economic apocalypse, are trying to find reasons why their forecasts went wrong. 

Has the moment of reckoning been merely deferred? Or is Mr Trump on to something? We should know for sure in 2026. 

 

US National Security Strategy document is hawkish on China and soft on India

The US National Security Strategy document was released a few days ago by the White House. I read media reports that said the document regarded China merely as an economic competitor, not an existential threat. And that India did not seem to matter.

The reports are wrong. The report is  hawkish on China and - this will gladden Indian hearts- it does see India as a counter-weight to China in the region.

Let me first highlight the positions the document takes with respect to China:

1. China has emerged as a threat to the rules-based international order.

President Trump single-handedly reversed more than three decades of mistaken American assumptions about China: namely, that by opening our markets to China, encouraging American business to invest in China, and outsourcing our manufacturing to China, we would facilitate China’s entry into the so-called “rulesbased international order.” This did not happen. 

2. No change in the US policy of preserving Taiwan's independence

 Given that one-third of global shipping  passes annually through the South China Sea, this has major implications for the U.S. economy. Hence deterring a conflict over Taiwan, ideally by preservingmilitary overmatch, is a priority. We will also maintain our longstanding declaratory policy on Taiwan, meaning that the United States does not support any unilateral change to the status quo in the Taiwan Strait.

2. Restrictions on trade with China will continue, both through tariffs and through export controls.

Since the Chinese economy reopened to the world in 1979, commercial relations between our two countries have been and remain fundamentally unbalanced. .......Going forward, we will rebalance America’s economic relationship with China, prioritizing reciprocity and fairness to restore American economic independence.Trade with China should be balanced and focused on non-sensitive factors.

 If that is not hawkish, I don't know what is.

The tone towards India is distinctly friendly.  

1. India remains an important partner in preventing  China's dominance in the Indo-Pacific region.

We must continue to improve commercial (and other) relations with India to encourage New Delhi to contribute to Indo-Pacific security, including through continued quadrilateral cooperation with Australia, Japan, and the United States (“the Quad”).

2. The economic partnership with India too is important 

President Trump’s May 2025 state visits to Persian Gulf countries demonstrated the power and appeal of American technology. There, the President won the Gulf States’ support for America’s superior AI technology, deepening our partnerships. America should similarly enlist our European and Asian allies and partners, including India, to cement and improve our joint positions in the Western  Hemisphere and, with regard to critical minerals, in Africa.

Not exactly effusive about India but friendly in tone. At least India is spared the harsh comments the document for America's allies in Europe. 

Key Supreme Court rulings awaited in the US

 In the months ahead, the US Supreme Court will pronounce on some truly important matters:

i. Trump tariffs: Is President Trump justified in using emergency powers to impose tariffs? Or is that the remit of the US Congress? If the Court rules against the Trump adminstration, the US  government will have to return billions in tariffs imposed so far. Legal experts say the President has recourse to several statutes for imposing tariffs, so he will prevail even if the Court rules against him.

ii. Birthright citizenship: Does being born in the US confer citizenship automatically? The Trump administration says it doesn't apply to illegal immigrants nor children born of those temporarily visiting the US.

iii. Can Trump fire officials of the Federal Reserve?: Trump fired Fed Governor Lisa Cook on the ground that she had committed mortgage fraud without such fraud being proved in a court of law.  A lower court judge blocked the order. The administration then sought to prevent Cook from attending office until the case was decided but the US Court of Appeals ruled against it. The Court has indicated that it is inclined to treat the Fed differently from other government agencies that enjoy autonomy.

"Putin ready to fight Europe"

 "We are ready to fight Europe - Putin"- that's the headline you would have seen in the media this morning.

Warmonger! you would have said to yourself.

Except that the complete statement from Putin was, "If Europe wants war, we are ready to fight Europe".

That's how the media distorts. 

India's labour reforms: more ease of business but greater cost of labour

India's long-awaited labour reforms make for greater ease of business. They reduce compliance costs for large firms  but will add to costs for small and medium firms and also push up labour costs. It's hard to see the reforms providing any great thrust to business in the medium term. 

These reforms had been enacted nearly five years ago but they have been notified only now. They reduced 29 laws to 4 labour codes; slash the number of regulations that cover businesses. They make compliance easier for big firms.

The new codes cover all workers instead of specified industries in the earlier version. This will mean compliance or more compliance for a whole range of firms, especially small and medium firms. Large firms already comply with many of the norms, so will not feel the pinch as much.

Industry's main demand was ease of firing. The new code raises the threshold were permission for layoffs is not required from 100 workers to 300 workers. This is not going to induce investment into labour-intensive sectors such as textiles, leather, auto compoents etc. along the lines of Soutth-East Asia. Moreover, most states already have the higher threshold, so the higher threshold will not much of a difference on the ground.

The new laws cover gig workers. They will specify minimum wages across four categories of workers under six different working conditions. All workers will be covered by welfare benefits such as Provident Fund, insurance, sick leave, mandatory health check-ups for workers over 40, etc. This will tend to push up labour costs.  It will hugely impact businesses such as Uber, Ola, Amazon, Flipkart etc. 

It's hard to see businesses complying with the requirement of benefits to workers. They will outsource jobs from firms that do not comply - and that means more income for government officials who monitor compliance.

Overall, there are benefits for companies as well as workers with the new codes tilting more towards the latter. 

Can Europe decouple from the US ?

One of the high points of Trump's present term is the way Europe has grovelled before him. The EU's resistance to Trump on Ukraine has been feeble. And on trade, it has signed a pact that allows the US to impose a tariff of 15 per cent so that Europe has the privilege of accessing the US market.

There is also the way Europe's leaders- Macron, Starmer, von der Leyen- have been treated by Trump. Europe's public is said to be seething but that has not influence government policy. 

Some Europeans are beginning to think the unthinkable: Europe must decouple from the US. Martin Sandbu, columnist of the FT says this must happen in three areas: trade, finance and defence.

On trade, Europe must reduce trade exposure to the US market below what the private sector is having now. How to do this? Reduce incentives for exports to the US and retaliate against US tariffs by imposing tariffs on the US, notably on their services exports. Both exports to and imports from the US must fall, so that Europe is less vulneable to American pressure.

On finance, Europe must stop exporting capital to the US- use regulation to acheive this.

On defence, Europe must become more self-sufficient- presumably by spending more.

Is it feasible? European reliance on the US defence shield is the key. The answer is not just the gradual removal of the shield. Europe has to rethink its relationship with Russia. As long as Europe believes Russia is a threat and assumes a hostile posture, it cannot rid itself of the American defence shield.

The trade and finance exposures are easier to correct. But they will certain entail economic costs in the medium-term. Europe will have to sacrifice growth and well-being. That is even more difficult than self-sufficiency in defence. 

When the US imposed tariffs of 39 per cent on Switzerland, the country's President rushed to the US to negotiate a lower tariff. She was rebuffed. Then, leading businessmen called on Trump with gifts and managed to get the tariff down to 15 per cent.

Switzerland has a per capita income slightly higher than that of America's $89,000. It is one of the richest countries in the world. Yet, the Swiss don't have it in them to stand up to the US if it means a drop in the standard of living. The same is true of the rest of Europe. Decades of dependence on US largesse for defence has got the continent used to a soft life.

Europe can decouple from the US only if it is willing to make a huge shift in foreign policy that reorients its relationship with Russia and China. One can't see that happening. 

Three key US negotiators have no foreign policy background

President Trump has three negotiators in the foreign policy for various purposes: special envoy Steve Witkoff, army secretary Dan Driscoll and his son-in-law Jared Kushner.

None of them has a background in foreign policy or diplomacy. Witkoff is a close friend of Trump's from their real estate days. Driscoll served briefly in the military before working in investment banking and venture capital. Kushner is a businessman who helps his father in law in sundry matters.

Witkoff has been active in respect of Ukraine and earlier was involved in talks with Israel about Gaza. Driscoll has recently been pressed into service in respect of Ukraine, as has Kushner.

Does it matter that we have three businesmen handling  negotiations and not career diplomats?  Not really. Because not one of the three persons is setting foreign policy. They are merely implementing policy set by Trump. They are out to cut deals based on directions that Trump gives- and who better than businessmen to make deals?