India must project itself as ready, waiting and willing in a Trump era, says Sajjid Chinoy of JP Morgan

"India should expect that in the coming years, there will be a lot of opportunities, and a lot of churn of global value chain," said JP Morgan's Sajjid Chinoy.

Donald Trump's Presidency will pose unique challenges and uncertainty for India, which will have implications for our exports, Sajjid Chinoy, Head, Asia Economic Research, at JP Morgan said, in an conversation exclusive conversation.

"Emerging markets will have the worst of all worlds while you are dealing with lower global growth, but you are still dealing with tight global financial conditions," Chinoy added.

Here is an edited excerpt of the conversation, where Chinoy underscored that during Trump 1.0, the global sentiment amongst business and consumers did slow down, along with a slump in global capital expenditure.

Q: This is a huge vote of confidence for the Modi government. They're presenting their first budget in their third term, which in itself is a tall order. It comes right after we've seen a global shift with a new US President Donald Trump, who has not held back when it comes to pitching the new global order. Let’s begin with the global context. How concerned should India be about what we’re hearing from Donald Trump, and how does that complicate our budget-making exercise?

Sajjid Chinoy: I think it's first important to disentangle what these global forces are, as there are two forces and they tend to get conflated. The first is even before Trump, what the world grappled with in 2024 was this concept of US exceptionalism, where the US economy continued to do better and better than what anyone thought.

Most people have predicted the US going into recession in sometime 2023 or definitely in 2024, and exactly the opposite happened. Not only did the US escape recession, but it was growing very strongly.

Now, why does this matter? It matters because growth differentials around the world determine exchange rates. What we saw was because the US was doing so well, Europe had stagnated and China was under pressure. The dollar has been extremely strong over the last six months, and that has put sustained pressure on emerging market currencies, including the rupee.

The second reason was that strong US growth made the last mile of US disinflation much harder. So, expectations that the Fed would be cutting interest rates dramatically in 2025 have been allayed, and you now have a situation where markets have gone from five Fed cuts to just one cut, or less than that.

That has meant that apart from the dollar being stronger, US yields are higher. In other words, global financial conditions have remained elevated and tight. And that's put pressure on emerging market currencies even before Trump.

Read More: See slower global growth, weaker exports in Trump 2.0: JP Morgan's Chinoy

In a Trump 2.0 presidency, it's hard to tell what will actually happen because there are so many moving parts. I think the one thing we can say with certainty or with some degree of confidence is that uncertainty is going to rise. We saw that in Trump 1.0, that when there are concerns about policies being changed every day, every week, every month, businesses tend to retrench and businesses, you know, don't like uncertainty.

Around the world, we saw in Trump 1.0 that the global sentiment slows both business and consumer sentiment, and even global capex slowed down. One element that India will have to grapple with is that it is possible that the continued uncertainty in the global environment will slow global growth. That has implications for India's exports in the coming years.

I think the challenge for emerging markets is that, one, you could be dealing with slower growth if there's continued uncertainty in the global economy. On the other hand, if US exceptionalism continues, you could be in a funny situation where growth around the world slows, but US growth slows less than the rest of the world.

There could be offsets in the US economy because what Trump has always promised is a lot of deregulation, which will help corporate business investment in the US, and more fiscal easing. You're in this very strange dynamic where global growth is slowing, but US growth is slowing less, which means US exceptionalism continues. And then emerging markets have the worst of all worlds where you're dealing with lower global growth, but you're still dealing with tight global financial conditions.

Last thing I'll say in all of this is about China. Conditions in China are very different this time than in 2018. China is sitting on a lot of excess capacity across multiple sectors. If the US, China get into a trade war, the concern for countries in Asia and other emerging markets is that more and more of this excess capacity gets redirected to those economies, and that has implications for manufacturing.

There are lots of moving pieces and this could be a tricky and volatile year for emerging markets. So, India will have to be very vigilant.

Q: Trump's promise of make America great again and the proposed deregulation, lower corporate taxation, How does that impact India? How do you see this playing out in the Indian budget? Do you think there is room for corporate tax rate cuts? Do you think that there is room for measures to be introduced to enable more FDI to come into the country? Should this budget be used as a statement that the Modi government makes to the world - we are open for business, come to India and invest?

Sajjid Chinoy: This is a unique opportunity for India. It is the first budget of a third government so there's more political capital, but also, in the near term, the world will be a dangerous place because of all the factors we discussed. Medium terms opens up a lot of opportunities. Yes, the US would like companies to come and manufacture back in the US. But remember, the reason why companies are not in the US right now is because it's cheaper and more efficient to manufacture outside, to manufacture in China, or India, or Indonesia. If you do have a situation where tariffs are imposed in some countries, my sense is the first impulse of companies will be to look for other lower cost efficient locations, before you go back to the US, which is much higher cost, and you could lose your competitive advantage.

India should expect that in the coming years, that there will be a lot of opportunity, there's going to be a lot of churn of global value chain. If you do get into a protracted US-China trade war then, one, you will have multi-national companies looking for other places outside of China. India will very much be in that shortlist. Two, you will have Chinese FDI looking for other homes in the region.

There are lots of opportunities that will open up from this. Now, what can India do? I think India has to project itself as being ready, waiting and willing. And I think this is where the July budget was important, because that really was the first budget, and an intent statement was made by the Finance Minister. The leitmotif was employment incentives, but the Finance Minister spoke about the importance of structural reform and working with the State, coming out with an economic policy framework to guide the vision for the coming years.

There were very important rationalizations of import tariffs for the first time in many years, tariffs were brought down. And remember, the foundation of trade theory is an import tariff is like an export tax. When you're bringing import tariffs down, you're actually sending a strong signal that you want to promote export.

There was talk about reimagining India's financial sector architecture, making the income tax code easier, revisiting basic customs duty. There were a lot of very important starts made, so, what I'd be looking for in this budget really is what happens in all of those areas.

Of course, these are long standing projects, but which of these are we taking ahead? What plans are being made to operationalize and execute and implement some of these initiatives? We need to be realistic on the fiscal roadmap. We are in a consolidation stage, fiscal deficits have to come down because public debt is gapped up. In fact, public debt has been inching up the last couple of years. Deficits have to come down, and we can debate what the pace of consolidation has to be, but we'll have to see some fiscal consolidation, which means that fiscal pace is constrained, and that there are limited degrees of freedom on that front. I think the stimulus will have to come from reforms outside of the fiscal math.

Q: Let me quickly go over some of the domestic challenges that we are facing. One is an evident urban consumption crisis, something that has been voiced by FMCG companies. We're seeing a slight uptick in rural consumption but that's not enough. Second is that private investment has not picked up. What according to you are the levers that this budget needs to push?

Sajjid Chinoy: I think it's important to diagnose why has urban consumption slowed? Why has investment not picked up? I think the private investment story is a more straightforward story because I've had this view for several years now that the good news is that the supply side has been cleaned up. We've seen the deleveraging of private sector balance sheets which is very healthy, cash levels are high. But you have to understand the psyche of entrepreneurs, when utilization rates are about 75%, which they've been more or less in the last few years. If you look at India-China bilateral trade, the deficit is close to the highest we've seen over the last decade. A lot of import is coming in and in that environment of cheap imports and with utilization at 75%, you do need more demand visibility. It's when you have the demand visibility that you will make investments. A lot of this has to do with animal spirits too, and here we live in a very integrated economy. So, all this global uncertainty under Trump 2.0 and churn will weigh on corporate sentiment around the world, not just in India. I think the key for us to stoke a private investment cycle is to deliver more demand visibility. Now, to government's credit, it's been focusing very hard on public investment, Centre’s public capex has almost doubled from 1.7% of GDP to 3.2%. It's important that we don't let up on momentum on that front. There are limited degrees of freedom, but we need to continue on that path, so that you provide some demand visibility.

This is where urban consumption becomes important, because it was a key driver of growth in the first two or three years, but some slowdown was inevitable. What was driving urban consumption? There were three factors in my mind. One, you had a lot of excess financial savings from the pandemic that people had made these savings in those two-three years, and they were running it down. Those savings have largely been extinguished.

Two, if you look at the formal sector wage growth for the 3,500 listed companies, these were running at 15%, and that has slowed to about 9-10%. Some consumption was being financed by unsecured lending. That was unsustainable and I think the RBI correctly tightened the screws 15 months ago when it raised risk weights for unsecured lending. From an urban consumption perspective, if the stock of savings has been exhausted, wages at the margin are slowing, and you've seen some tightening in macro-prudential measures, it stands to reason that urban consumption would slow. It should not be a surprise.

Stepping backwards, I think the larger issue really is employment and jobs, that consumption over a five-year period is going to track incomes, and therefore job creation. I think the measures that were started in the budget in July were important because there was a signal here that we want to make India's growth more labour-intensive. If you look at the Annual Survey of Industries Data, the capital-intensity in manufacturing has continued to rise and has increased around the world. But, for a young country like India, to get very capital-intensive growth is a challenge. We have to make growth more labour-intensive.

Now what does this mean? I would say that if we have been realized, it should be a labour-intensive sector, and we want to make significant investments in human capital, health and education to make our population employable. If you ask me, one set of measures has to be, how do we make growth more labour-intensive? There were important starts that were made in the July budget, but we need to take that now to its logical conclusion.

Q: When it comes to modernizing an economy and creating jobs for a country where there is, you know, a majority of the population that is blue-collar, how do you balance it out?

Sajjid Chinoy: Jobs are never easy, and they're going to take a thousand small steps. We should try everything possible to boost jobs. It's undoubtedly the case that manufacturing has become more automated, more capital-intensive, but there are still some labour-intensive sectors and what you want is, everyday entrepreneurs making a choice between capital and labour. To some degree, there is substitutability in some of these sectors and what you want to do is to ensure that there is a fair choice.

The State and society is doing everything possible to give labour the best chance, and that means more education, more skilling. We have to make our workforce more employable, which means better educational standards, more skilling, more internship. It's going to take a thousand small steps, and a village to do this.

On the demand side, are there certain laws that are tipping the scales in favour of using more capital-intensive techniques? If you've got labour laws and the perceived cost of labour is getting higher because there are some frictions, can we do things to rationalize that? If the state is going to give incentives and use industrial policy, can we redirect those towards labour-intensive sectors? The good news is China has pivoted hard, towards capital-intensive sectors.

They're doing, you know, AI, solar panels, electric vehicles, but what they're doing in that process is they've given up a lot of space in the traditional, more labour-intensive, lower manufacturing. That space is vacant. India should be seeking to occupy that space. I think the July budget made an important start in recognizing that we need to make more growth, more employment-intensive, and there are a thousand different measures, supply side, demand side, regulatory, that we need and that's going to be a work in progress.

I think that has to be the overarching policy objective in the next decade. How do we make our growth more labour intensive during our demographic transition? The next 10 years is really important as that's when our demographic transition peaks. In Asia, 44% of the per capita income growth between 1960 and 1990 was attributable to the demographic transition. It's been those decades where people had this opportunity that they've really been able to press the accelerator on growth. Therefore, the next 10-15 years becomes really important for us to exploit that demographic transition.

Q: Is there a case for tax rate cuts, which is an idea that's been doing the rounds, that the middle class needs a break. Income tax rates need to be rationalized and that could boost consumption. Do you subscribe to that school of thought, or do you think it's going to have a very limited impact, and, there are other ways of boosting urban consumption?

Sajjid Chinoy: The first recognition is that fiscal space is constrained because deficits have to come down. We have to be cognizant of the reality that the deficit this year could be 4.9% or 4.8%. It has to go down to 4.4%. What you don't want to do is compromise on the critical investments that any economy needs. We've begun on infrastructure, we should not let that go because we're seeing less of that at the state level in the last few months. So, the Centre has to keep going on infrastructure. We also spoke about the importance about health, education, and scaling budgets.

Budgets themselves may not be a sufficient condition, but they would be a necessary condition. So, if you've got all these important investments to make, and you've got deficits to come down, something has to give. Markets are asking for a targeted tax cut, but if you're stepping back, it's also important to realize that fiscal multipliers are larger on the expenditure side than on the revenue side.

If you want to help someone, spend more resources at the bottom of the pyramid. More spending tends to be a larger fiscal multiplier in the economy than giving tax cuts, which can be some of which is saved and all of it is spent. But again, these are judgments that have to be made.

Q: Does it worry you, Sajjid, that our competitive federalism is getting replaced by competitive populism? Do you think we are reaching a point where we might be leaning towards offering more freebies to boost consumption?

Sajjid Chinoy: I think there has to be a recognition here that there is no free lunch and that there's an opportunity cost of expenditure. What was important last year was that the center of public investment was complemented by the state. So, if you look at FY24, you saw a big push by the states on infrastructure. Capital expenditure went from 2.4% to 2.9% of GDP. This year, what we've seen in the last 8-9 months of the year is that the quality of state expenditure has deteriorated in the sense that we've seen subsidies and revenue expenditures go up at the cost of capital expenditures.

There has to be a recognition at the state level that state fiscal deficits are close to their 3% cap. Now, when you're close to your cap and you increase some form of subsidies - we have to be very cognizant here that there's an opportunity cost to this. I'm not saying subsidies are not warranted, targetted subsidies are important at the bottom of the pyramid.

Today, it's going to be public investment. In the months and years to come, it may well be the investments we require in health and education. So, those are the critical investments we have to make in the next decade. Physical and social infrastructure, making our economy more competitive - those priorities should not get undermined by competitive populism.

Q: Sajjid, what are your three big asks from this budget, the three things that you'd like to see the Finance Minister address?

Sajjid Chinoy: I think there are multiple objectives that the Finance Minister is going to pursue. Before I give you three things, I think the challenge for India in 2025 is how do you respond to the domestic growth slowdown without appearing to lower your guard to a hostile global environment.

Now, what are the three things? I think continuing with this employment theme that was started in July and extending it beyond incentives to PLI schemes for labour-intensive sectors, and more importantly, a focus on health and education to make labour more employable.

This whole package on human capital augmentation and employment's crucial, that is one. Number two, the Finance Minister did speak about working with the states on factor market reform (labour, land and capital). That was a really important part of the speech and we spoke about the global context, that as companies look at India and they shortlist to relocate here, we have to give the impression that we're ready, willing, and waiting and make the business environment extremely competitive. Those are the two big themes that need to work. I know markets will look closely at the fiscal framework.

The government has said that from this year on, fiscal deficits will be calibrated to a declining debt to GDP ratio. If it is a declining combined debt to GDP ratio, that's good.

I think those are the three things one would look for, in terms of big picture. What is the fiscal framework going forward to preserve macro stability? What is the roadmap for structural reform in the first budget of the third government? And what are we doing to make growth more labour intensive?

Why Budget 2025-26 shouldn’t all be about tax cuts? Watch the video interview with Sanjjid Chenoy on Moneycontrol right here.

Q: At the start of the conversation, you mentioned that you're expecting general slowdown to continue, especially in the emerging markets. What's your outlook for India for the current fiscal and for the next fiscal?

Sajjid Chinoy: There's just so much uncertainty at this point because we don't know how the global economy is going to evolve. I think that's going to have a bearing on all emerging markets. What I will say is that even as fiscal policy is consolidating, monetary policy will have some space to respond to a slowing economy. We've already seen that in the last few days and weeks, the exchange rate has become more flexible and has depreciated, which is an easing of monetary conditions. You've seen that central bank has injected a lot of durable liquidity. Inflation is coming off, which is really good news.

That should help purchasing power. We think headline CPI will average 4.5% in the next 3-6 months. That means, there's relief on purchasing power, and space opens up for monetary easing. There are lots of moving parts in the near term but I think the key is, if India has to grow at 6-7% or higher in the next decade, which is our aspiration, it will have to be on the back of persistent structural reforms.