Trump who? It's domestic growth that drives both hopes and risks

For all the sound and fury, stock markets don’t price in narratives for long. They are slaves to earnings.

The market dipped less than 1% in reaction to news of Trump’s proposed 25% tariffs on Indian imports only to climb back up and close only slightly in the red. This reflects a broader market belief that Trump’s tough talk on tariffs is more about posturing than policy. It’s a familiar negotiation tactic — demolish the anchor, escalate, then de-escalate once leverage is created.

This time, politics are clearly in play, not just economics. Brazil was slapped with a 50% tariff for standing its ground. China has long been in Trump’s bad books. India, too, came under fire — particularly for its economic ties with Russia — but that’s more geopolitics than trade math.

For all the sound and fury, stock markets don’t price in narratives for long. They are slaves to earnings. A geopolitical premium may have been part of the story earlier – that India could successfully navigate a multipolar world – but fundamentals always reassert themselves.

What lends resilience to the Indian story truly is India’s relative insulation from global trade shocks. That’s the good news. The bad news: that’s exactly where the risk also resides.

1. Trade? Small fry in the GDP ocean

The direct impact of the 25% US tariff on Indian exports is limited. As fund manager Samir Arora quipped in a tweet: India’s exports to the US are about 2% of GDP. A 10% fall in those exports translates to a 0.2 percentage point hit to GDP. With 6% growth, that’s recoverable in just 12 days — “Work weekends for six weeks and we’re back,” he joked, earning both laughs and a jab for channelling his inner NRN.

On a more analytical note, Neelkanth Mishra estimates the incremental impact of the 25% tariff at $10 billion. The difference between a 15% tariff versus a 25% tariff is $6 billion. Mishra stated in a note that the deal isn’t final, but Trump’s proposal may leave limited scope for negotiation, and that India’s official response suggests there is limited political room.

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Even then, effective tariff rates for India remain in line with peers: Vietnam (20%) and Indonesia (19%). Meanwhile, some of the US demands — ranging from acceptance of GM crops to shifting defence procurement from Russia — are non-starters politically.

Looked at another way, India’s merchandise exports to the US stand at $87 billion. Factoring in some losses due to negative tariff arbitrage with competing countries, some gains from rupee depreciation, and price adjustments on goods exported to the US, some economists estimate that exports might take a hit of up to 25%. That math would imply roughly a $20 billion loss — shaving off about 0.5% of GDP.

It is not an insignificant impact but not a huge impact either — especially in a year when private consumption, a bigger growth driver for India, is likely to surprise on the upside. For this year, consumption at the lower income group, where marginal propensity to consume is higher, is looking up — thanks to a good monsoon and low inflation.

Now, to the bigger picture: for a country the size of India, exports can be a growth driver for a couple of years, but not a sustainable growth engine, several economists argue. For significantly smaller economies like Korea, Taiwan, and Vietnam — and even China in its early years of growth — exports made a tangible difference to GDP. But today, China is an $18 trillion economy with a trade surplus of less $1 trillion.

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So while vibrant exports are good to have, they are not make-or-break for India’s overall growth — nor for its manufacturing ambitions, where import substitution can provide a bigger push.

2. Growth? Depends on your glass

As for stock markets, the macro picture offers arguments for both the optimist and the sceptic.

On the positive side: pristine corporate balance sheets, a reasonably strong government fiscal position, low oil dependence, soft crude prices, and benign inflation.

On the cautionary side: weak consumption trends and single-digit bank credit growth remain overhangs, with no signs of a material uptick. Optimism about consumption at the lower end is pitched against the risks of AI-led job losses and an uncertain business environment where private investments are constrained. Companies are focusing more on cost cuts — often via job cuts — which affects both consumption and investment.

The “China Plus One” theme may lose some shine, and export-focused stocks may underperform for a while, as markets had been counting chickens before they hatched. Overall, exports are less dominant than imagined. Export-focused companies make up less than 15% of listed market cap.

3. Flows? Foreigners no longer in the driver’s seat

Although investors are interpreting Trump’s statement as a way of mounting pressure on India, it crashes the narrative that India can navigate a multipolar world with such ease.

This may cause some foreign investors to reassess the premium they pay for Indian equities because of this perceived sweet-spot at a time when Indian valuations are anyway elevated and the dollar’s direction is not clear. In the post-Trump period, India has anyway been at the bottom of the pack among global markets.

Foreign flows, while they do impact sentiment, and sentiment too draws in flows, there is enough evidence that they don’t determine market performance over the medium to long term, going by experience kin other global markets historically.

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In any case, foreign investors’ dominance has waned: their share in Indian equities now trails that of domestic institutions. Mutual funds — now the preferred savings avenue for Indian households — have created a steady domestic flow. The bigger issue is not a lack of capital, but a shortage of good investment opportunities — too much money chasing too few stocks.

As of March 31, DIIs held 17.62% of Indian equities. In contrast, the share of FIIs slid to a 12-year low of 17.22%.

How global flows move going forward is still unclear, since much depends on the strength of the dollar. They may or may not come gushing back, but if they do, it won’t be because of India’s export story anyway.

4. Risks? Not in the market’s immediate radar

So what’s the risk? The main risk to markets stems from valuations — which will ultimately be justified or challenged only by earnings, where the outlook remains mixed.

One unknown is Trump’s potential to weaponise software services — possibly to pressure India into reducing its economic ties with Russia. Such a move could directly hit India’s IT sector. But for now, this remains speculative and is not something the market is pricing in.

Stocks aren’t particularly cheap — but they aren’t overly expensive either. In previous cycles, markets have not peaked at benchmark P/E ratios below 25x. By that yardstick, there may still be room to run.

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The most plausible scenario: patient capital from retail investors — via SIPs — continues to support equities, while the market rotates from one pocket of stocks to another based on tactical shifts. This could keep markets moving sideways with modest upward or downward drift.

For direct investors, the message is clear: excess returns will likely come from prudent range trading, not from macro surprises.