Moneycontrol Pro Panorama | A trade pact that dispels the blues

The India-US trade agreement has broader implications.

Dear Reader,

A wave of optimism swept through the Indian stock markets on Tuesday after India and the US reached a trade deal. Under the new pact, details of which are awaited, tariffs on India’s exports to the US will go down from a punitive 50 percent to 18 percent. That's a significant breakthrough for Indian exporters affected by the high tariffs.

But the India-US trade agreement is not just about merchandise trade. It has broader implications.

At the macro level, it reduces the uncertainty for the Indian economy. “The most important gain—cutting across asset classes and sectors—is the sharp reduction in uncertainty,” writes Manas Chakravarty.

Ever since the imposition of new tariffs, the relationship between the two countries came under strain. Exports to the US lost momentum, the rupee weakened and selling by foreign investors intensified. A new trade agreement should help reset the economic ties.

“It (the trade deal) sets the stage for broader economic gains for India in terms of foreign investment flows, defence deals, and technological elaborations, adding momentum to India’s march towards a $5-trillion economy,” writes Abhijit Kumar Dutta.

Pertinently, the new 18 percent tariff is lower than the Asian peers. This improves competitive positioning of Indian exporters. Textiles, chemicals, auto ancillaries, gems & jewellery and aquaculture are among the sectors that will benefit from lower tariffs, explains our Research Team.

The US is India’s largest export destination. The improvement in exports can help stabilise the Indian rupee and can potentially set the stage for the return of foreign investors. That can reverse the underperformance of Indian stock markets vis-à-vis global peers, even though much also depends on other factors such as earnings and valuations.

“Combined with the recent large EU, UK and other Free Trade Agreements signed, the view on the Indian rupee could get substantial boost in the near term -- This could act as a positive trigger for FPI flows,” analysts at Jefferies India said in a note. FPI is foreign portfolio investment.

Still, much also depends on the final deal contours, the global economic environment and follow-up actions by both the countries.

The future actions regarding visas and IT professionals will have implications for the domestic services sector, writes Shishir Asthana. Also, purchase of large quantities of energy from the US and Venezuela can raise India’s import bill, he warns.

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