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What Will Be the Impact of the US Election on the Indian Economy and India-US Ties?

Editor, TRANSFIN.
Nov 3, 2020 3:29 PM 6 min read
Editorial

It’s Election Day in the US today!

The question of who lives in the White House has considerable bearing on India. Thanks to the United States’ central position in global finance and India’s increasingly close relationship with America.

There are, of course, many other forces at play - geopolitics, climate change, immigration, strategic partnerships, intelligence sharing and anti-terrorism efforts, to name a few.

But for the sake of brevity, let’s analyse the possible US election fallout on India through a strictly economic lens.

(For an historical overview of India-US ties, read this.)

 

Broadly Speaking...

Indian markets are expected to fare reasonably well regardless of who wins the election.

An analysis by UBS Global Research predicted that India will benefit from all three possible outcomes: 

  1. Joe Biden winning + Democrats taking control of both chambers of Congress (a “blue wave”, as it were)
  2. Biden winning + status quo maintained in Congress (i.e. Democrats in control of the House and Republicans in control of the Senate)
  3. Status quo maintained overall (i.e. Donald Trump winning + the same dynamics in Congress)

What’s the rationale behind this hypothesis?

Primarily that India is increasingly being seen by Washington as a crucial ally in Asia and a possible bulwark against China.

Both Trump and Biden have publicly affirmed that they will pursue a foreign policy favourable to India. So there’s no reason to believe that relations between the two countries will be grossly affected based on the White House occupant.

Therefore, markets and investor sentiments are generally blithe. Markets may not react violently tomorrow based on who wins. Unlike in 2016 when Sensex tanked by 1,600 points in initial trading hours (but to be fair, even then, the slide was largely on account of the recently-announced demonetisation decision).

PS - There’s a fourth possible outcome. This involves a litigious or an unwelcomingly close election result that could be contested in courts for weeks. The uncertainty that such a result would spark could tank markets the world over, let alone India’s.

However, there could be long-term impacts based on who is the US President for the next four years.

 

Fed 2022

Whoever wins the election will have to deal with a recession, record high unemployment, and an economy devastated by the coronavirus pandemic.

Furthermore, the next President will have the opportunity to name the next Chair of the Federal Reserve (Jerome Powell’s term ends in 2022). This will inevitably have significant ramifications on US and global monetary policy.

Biden’s nominee for Fed Chair is likely to pursue a nuanced and dovish approach, possibly continuing the current near-zero interest regime. Trump, on the other hand, has repeatedly pilloried Powell for not slashing rates quicker and has sought a negative interest rate regime, like the ones in Europe and Japan. Therefore, his pick may be more...provocative.

Arguably, lower or negative rates in the US bode well for emerging markets like India, leading to more foreign capital inflows. But a stronger Rupee may also be bad news for export-oriented Indian industries, particularly IT.

Speaking of IT...

 

Sector-Specific

A Democrat in the White House would champion more government stimulus and spending (= a weaker Dollar), raise taxes on corporates (= hurting margins of Indian cos operating in the US), increase public health spending (= more opportunities for Indian pharma) and dilute immigration curbs (= more opportunities for Indian workers).

A Republican President, on the other hand, might not be as loose with the purse strings, cut taxes, reduce reliance on Indian pharma and raise immigration barriers.

These factors have a direct impact on sectors like IT, auto and pharmaceuticals.

But on a macro scale, all sectors’ exposure to India-US ties hinge on bilateral and trade relations between the two countries.

Which brings us to...

 

Trade Talk

In the last four years, despite the much-touted “personal chemistry” between Trump and Narendra Modi, trade ties between the two nations have regressed.

 

A Look At the Impact of the US Election on the Indian Economy and India-US Ties

It’s no secret that Trump is not happy about America’s trade deficit with India. He has frequently called India a “high tariff country”, denouncing its tariffs on everything from tech companies to Harley-Davidson motorbikes.

In 2019, the US removed India from its Generalised System of Preferences (GSP), which exempted import duties on certain goods. Steel and aluminium import tariffs were also raised. India retaliated with tariffs of its own on US products.

A full-blown tit-for-tat trade war was narrowly avoided when trade representatives from both sides sat down to hammer out a trade deal. But so far, despite the heavily publicised Howdy Modi and Namaste Trump galas, no deal has surfaced.

For its part, India has been reluctant to open its vast agricultural sector - a constant thorn in trade negotiations. The sector is dominated by small-scale domestic players who would not be able to compete with deep-pocketed American corporates. Moreover, the recently-passed farm laws that further opened the sector to private players have drawn much ire from farmers. Adding American companies to the mix is likely to be a near-impossible sell for the Indian government - even if it tries to cater to American demands.

Another bone of contention concerns the tech industry. Trump has criticised India’s digital levies - the so-called Google Tax - as unfair. Moreover, the Data Protection Bill, as and when passed, is likely to ruffle more American feathers considering that it proposes sweeping protections for personal data of Indian consumers.

Another Donald Trump administration is likely to continue pursuing a strong-handed and bilateral approach to trade relations. Joe Biden can be expected to be more conciliatory and willing to compromise - particularly so on the multilateral front.

But that’s not set in stone since the winds of protectionism are on the rise everywhere. Including in India. After all, “Atma Nirbhar Bharat” and “America First” are two sides of the same coin.

 

Of Immigrants...

Another Trump administration can be expected to take a harder line on immigration. This may not bode well particularly for H-1B visa holders or the 200,000+ Indian students in the US. A Biden administration, on the other hand, is expected to be more welcoming of immigration.

 

...And Diplomats

You can’t decouple geopolitics and economics. And the central geopolitical question in the India-US equation is probably China.

 

A Look At the Impact of the US Election on the Indian Economy and India-US Ties

Both Trump and Biden view Beijing suspiciously for its trade practices, human rights record and increasingly aggressive global posturing. But both have different answers on how to deal with China.

Trump is more brazen and antagonistic. His all-out trade war with China is the best example for this. And as someone who is disinclined to build consensus and taking a gradualist approach, he is more likely to resort to unilateral offense.

Biden, on the other hand, is more...typical, so to speak. A President Biden may rescind sanctions on Iran and reopen talks on the Iran Nuclear Deal. He would also rejoin the Paris Climate Accord and work for concrete international action against climate change. Doing these things would invariably require China’s support and involvement. So he might be more inclined to negotiate with Beijing and build consensus.

Coming to India: New Delhi certainly wants to be able to buy cheap oil from Iran again. And significant action against climate change is in every economy’s interest. But a more chummy relationship between Washington and Beijing may placate global investors’ fears and decelerate their flight from China. Not good news for a country that has been busy courting MNCs to manufacture in India.

 

Bare Geopolitical Necessities

In the end, when the dust settles and a new Presidential term begins in January 2021, India and the US will remain strategically aligned and economically interdependent no matter the result. The trade, tariff, tech and tax tirades between the two are not unsolvable.

In fact, considering the geopolitical realities of our time, it is in the best interests of both countries to resolve their economic differences at the earliest and forge a strong and sustainable partnership.

FIN.

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