Dear Reader,
When a door closes, look for an open window. This perhaps sums up America’s tariffs that keep coming and the response to them by trading partners, including us. US President Donald Trump’s fresh round of tariffs, now on branded pharmaceuticals, select furniture and heavy trucks, have tossed a fresh fistful of uncertainty towards investors. Trading partners would now scramble to handle this latest salvo and the keywords near-shoring and friend-shoring are being tossed around again.
For Indian drugmakers, it is more a mixed blessing. As our research piece here suggests, 95 percent of Indian pharma exports to America are generic drugs, right now outside the tariff firing line. In fact, drugmakers could benefit as branded prescription drugs become expensive due to tariffs, which help generic medicines to take the lead in the US market. Even though stocks of pharmaceutical companies lost 4 percent in early trade today, it seems we have dodged this bullet for now.
What will hurt Indian companies is the exponential hike in H1B visa fees that will leave the IT industry -- the highest sponsor of worker visas to the US -- with burgeoning costs. The IT industry has not been able to catch a break over the past several years as employment challenges from artificial intelligence (AI), and competition from global capability centres (GCC) and now visa costs have hammered it. How does the H1B visa hike make matters worse is explored by Ananya Roy here in her piece.
Meanwhile, the 50 percent tariffs on our exports are still sinking in. The logical recourse when about a quarter of our gross domestic product (GDP) growth is under threat is to either support it through short-term policy measures or focus on beefing up the other 75 percent of our GDP to make up for the loss. While the first has been tried by the government, the antidote to tariffs may well be the second measure.
That explains New Delhi’s efforts to lift domestic consumption, which was already under pressure for the past year. The income tax relief in the Budget that began addressing consumption deceleration, along with the Goods and Services Tax cuts, is expected to inspire Indians to loosen their purse strings and fulfil their aspirations. Prime Minister Narendra Modi has appealed to the citizens to take advantage of the extra savings he has put in their pockets in his address to the nation last week.
The festive season, currently on, would determine to what extent citizens are taking the measures seriously.
To give fence-sitting consumers another push, there is the Reserve Bank of India (RBI). The RBI’s monetary policy committee’s six members will huddle next week to decide whether another cut in the repo rate is warranted. Investors are hoping for a cut since inflation is well under control and Trump’s tariffs are threatening growth. Some analysts believe there is little reason to cut since growth indicators have followed the RBI’s expectations so far. But analysts at Nomura ask a pertinent question: Why wait to cut when inflation is well within your desired boundary and you know that growth would be affected down the line?
Suffice to say it would be a tricky decision for the MPC. For the RBI, there is another spot of bother from the depreciating Indian rupee. At an all-time low, the impact of a depreciating currency on exports is limited, but it can make already high dollar outflows worse through feedback loops. What’s more, the RBI is constrained by its own position in the foreign exchange market, as our Chart of the Day highlights, to intervene and support the rupee.
There is also some soul-searching for the central bank. Funding the growth of the economy has not been majorly through the banking sector, which the RBI controls to a great extent. Non-bank lenders and the equity market has been a big source of funding for Indian firms in FY25, as our piece here highlights, and this may continue in the current fiscal too. That dims the effectiveness of the RBI’s monetary policy to influence the economy through the funding channel. So, what can a rate cut do?
It certainly is not the only antidote to tariffs, but perhaps it can be a beginning.
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