Indian banking’s held back by inadequacy of long-term funding

Indian banking’s held back by inadequacy of long-term funding, MoneyControl, April 21, 2025.

India must watch out for GDP growth with third chance at doorstep

Business Standard April 15, 2025

With every passing day, the outcome of the global tariff war grows harder to predict. One thing is clear, though: it will have significant repercussions for India. Policymakers must find ways to limit the damage to growth—and explore how to turn this setback into an opportunity.

It maybe tempting to dismiss the tariff war, given India's predominantly domestically driven economy. Exports to the US make up only 2.3 percent of GDP, and even that may overstate their impact, as products like iPhones that India sends to the US have low domestic value added. Additionally, not all exports would be adversely impacted even if the US imposes a 26 percent tariff. In fact, some analysts believe the impact will be limited, since the tariff proposed for India is lower than those envisaged for China, Vietnam, or Bangladesh—potentially giving India a competitive edge.

This optimism is misplaced. India’s supposed competitive edge may never materialize because other Asian countries could negotiate lower tariffs with the US. It also seems likely that Canada and Mexico will keep their preferential access to the US. This implies that if Indian exports do end up facing a 26 percent tariff, exporters like auto parts manufacturers who compete with Canadian and Mexican producers, will likely lose significant ground in the US market.

Export-oriented services firms in India will also be affected. History shows that when the US economy slows down—which now seems inevitable—American companies delay investments, reducing demand for support from Indian IT firms and Global Capability Centres (GCCs). That is why IT stocks have been among the hardest hit in the recent market downturn.

More importantly, the ramifications of the tariff war go far beyond the difficulties that Indian exporters may face in the American market. An inward turn by the US and rising US-China tensions would weaken the global economy. Indian firms would consequently be hit on multiple fronts—declining global sales and falling prices. And it won’t just affect exporters. Domestic firms would also suffer, as Chinese goods, blocked from the US, flood India and other open markets, thereby cutting into the profits of domestic firms.

Arguably, falling global oil prices—WTI crude has dropped to just over USD 60—will offer some relief. But profits are still likely to fall sharply, as the declining Sensex suggests. In response, Indian businesses will cut investments to conserve cash, and wary households will scale back spending. As a result, all key drivers of the economy—exports, investment, and consumption—are likely to slow down.

That's not all. In times of global uncertainty, foreign investors often pull out of riskier emerging markets like India, moving their money to safer havens. This time, the risk is even greater, as the Reserve Bank of India and the US Federal Reserve appear to be moving in opposite directions. The RBI has already cut rates twice and adopted an accommodative stance, hinting at further rate cuts as GDP growth and inflation rate decline. Meanwhile, US tariffs could drive up prices, limiting the Fed’s ability to lower rates and may even cause the Fed to raise rates. The resultant narrowing interest rate gap between the two countries will put a lot of pressure on the rupee.

How should policymakers respond?

To their credit, Indian authorities have acknowledged the export threat, avoided retaliatory measures and seem to have stepped up trade talks with the US. For these negotiations to succeed—and to benefit India—it is crucial to lower tariff and non-tariff barriers, encouraging reciprocal moves from the US. India should also expedite trade deals with key partners in Europe and Asia. More broadly, it must position itself in the world economy as a reliable trading partner.

Regarding exchange rate movements, the RBI should let the exchange rate move freely, as a weaker rupee could help India’s exports and hence growth, especially if other emerging markets like China, also allow their currencies to depreciate in order to achieve greater export competitiveness. Moreover, any attempt by the RBI to prevent a currency depreciation by selling dollars and buying rupees would tighten domestic liquidity and hinder monetary transmission—an undesirable move when the RBI is trying to support growth through lower rates. Unpredictable foreign exchange interventions can also heighten economic uncertainty.

Less clear, however, is the government's plans to safeguard growth. The government has announced that it is ending the Production-Linked Incentives (PLI) scheme--a sensible decision considering the flaws of the program, but questions remain. How will the government encourage private sector investment? And how does it plan to take advantage of the forthcoming exodus of companies from China?

India has now missed two opportunities to convince firms to Make in India, the first in the 2010s when China began to lose competitiveness in low-tech products and the second more recently, when Chinese political risks started to increase. Unexpectedly, a third golden opportunity has now arrived on our doorstep. This time, we must ensure that we seize it.