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Last Updated : May 14, 2019 02:08 PM IST | Source:

Tariff Play | Trade war cloud darkens, but India sees a silver lining

Anubhav Sahu @anubhavsays
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Todays L/H


Escalation of US-China trade dispute poses risk to fragile growth recovery

Central banks are likely to turn more accommodative

Probability for a rate cut by the Federal Reserve has gone up

Global higher tariffs add to India's appeal as a manufacturing base

What a difference a fortnight makes!

The sudden turn of events in US-China trade talk has once again flipped the global stock market sentiment. Only about a fortnight ago, the Federal Reserve noted that international growth headwinds have faded. A big driver of such optimism was reports of progress on the trade front.

Things are not as rosy now. The S&P 500 is off 4.5 percent from its highs, post the latest Fed meeting. CBOE-VIX, the measure of market volatility, has surged from levels of 13 – a historically lower regime – to a reading higher than the average. Similarly, the yield curve of the 10-year, 3-month bond, which had steepened after the Fed meet, has flattened. But an inversion is lurking again.

That in effect has multiple takeaways for emerging markets such as India.

Also read: Fed meet: Receding growth concerns


There are ominous signs that may pose a challenge for the Chinese growth recovery in the external sector. This could have a negative rub-off on its domestic economy, which posted better than expected GDP numbers for Q1 CY19.

The IMF modestly upgraded growth outlook for China this year. Monetary policy and other credit measures seem to have worked in recent times. Furthermore, Chinese policymakers are betting big on a fiscal stimulus of the order USD 300 billion.

Although key global risk of a disorderly Brexit has dissipated, trade war can act as a wrecker-in-chief for the global fragile growth, including Europe.

So, we may see more attempts from central banks to keep an accommodative stance. The Fed, in particular, has more reasons other than inflation to stay put on policy rates. In fact, the CME Fedwatch tool assigns 42 percent probability to a rate cut by the year-end compared to 33 percent last month.

A scenario of moderate growth means softer commodity prices and lower inflationary pressure for a commodity importer like India.

In a scenario of growth moderation -- and not recession -- institutional money may make its way to select emerging markets where domestic economy is on the mend. Even smart money would find some merit to look at EM avenues where real interest rate differential is high.

Manufacturing boon for India?

The ongoing tariff tug-of-war also builds a strong long-term case for India’s manufacturing where we have already seen two major factors at play.

One, Indian manufacturing and R&D prowess in auto, pharma and chemicals has prompted global MNCs to either set up a base here or partner with local firms.

Second, China’s pollution control drive and labour cost dynamics have brought in a level-playing field vis-à-vis India. As a result, companies like Aarti Industries have emerged as the partner of choice for global agro-chemical players.

SRF and Navin Fluorine have also seen surge in specialty chemical exports in pharma and agro-chem space. CRAMS (contract research and manufacturing services) is getting more and more eyeballs and developed market players are looking at India as a preferred destination compared to China.

That also means companies in specialty chemicals such as Seya and Balaji Amines are able to pursue the import substitution policy more aggressively. Similarly, the dyes and pigment segment has benefited because of the China’s supply side reforms.

Now, higher tariff barriers are further extending this scope of business and this is getting reflected in rising exports. Going by the recent results trend and management communications, business opportunity for Indian firms in the US is expanding.

The trade spat has come as a blessing in disguise for chemical manufacturer NOCIL, which is growing its footprint in the US. Rain Industries too might incrementally gain from the ongoing trade confrontation. Having said that there is a word of caution as the trade situation aggravates, there is a possibility of increase in Chinese dumping into India. Something that Indian policy makers may have to closely attend to.

Nevertheless, the key positive takeaway is Indian manufacturing companies have used this breather to sharpen product portfolio, investing in value-added products and going in for more overseas collaborations.

Talk of manna from heaven? Well, this could just fit the bill.

Follow @anubhavsays

For more research articles, visit our Moneycontrol Research page

(Disclaimer: Moneycontrol Research analysts do not hold positions in the companies discussed here)

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First Published on May 14, 2019 02:07 pm
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