There are no companies in India with a potential of going to $500 bn: Jahangir Aziz, JP Morgan

Jahangir Aziz, head of emerging market economics at JP Morgan

The US Supreme Court could declare Trump tariffs illegal, but the reprieve for India would be short-lived, as America could impose tariffs on India under Section 301 and Section 232, said Jahangir Aziz, Head, Emerging Markets, JP Morgan. India’s high tariff barriers have not yielded the desired results. India needs to rethink protectionism and usher in capital market reforms to attract foreign investments.

“Only hedge funds and fast money invest in India by buying the index. People invest in companies. Give me a company valued at $5 billion or $10 billion that has the potential to go to $500 billion. Money will come in. Right now, there are no companies”.  Edited excerpts:

So, how are you looking at this evolving situation in the US? We are waiting for a Supreme Court judgment on the tariffs. What kind of impact would you see on global trade if the tariffs were considered illegal by the US?

We've been tracking the IEEPA court hearings for a very long time, since May, when it all surfaced. If you look at the original Court of International Trades judgment, which ruled IEEPA illegal for two reasons. First, in IEEPA itself, there is no mention of tariffs as an instrument of policy reaction. Now, IEEPA was created such that in the case you have a very unprecedented event, let's say a country takes US citizens as hostages, something extreme like that, there is no way in which you can respond to tariffs, etc. So, the idea was that then the President is allowed to have complete trade embargo. So, the term used in IEEPA is embargo.

So, the President can go against any country in the event of extreme emergency-like situations. The problem with what this White House has done is that you can't cite a trade deficit of 3.5-4% as an emergency because it's been happening for the last 20 years.

Number two is that, outside of IEEPA, there are at least four different trade acts that specify what the President can or can't do, with guardrails. So, the argument by CIT, the Court of International Trade, is that if Congress intended to give the President unlimited power over tariffs, they wouldn't have separately placed restrictions on the President's tariff powers in four or five different trade acts. So, the Congress never intended for the President to have unlimited power unless it's an emergency situation. And in the case of an emergency, you can use a trade embargo, but you can't use tariffs. Now, that went to the Federal Appeals Court and the Federal Appeals Court upheld the CIT's decision and is now with the Supreme Court. If you look at the hearing on November 4th or 5th, when it was held, similar questions were raised by the Supreme Court justices during their questioning.

This Supreme Court in the past have made the argument that if a question is of major consequences, then it has to go back to Congress, the President can't rule on it. And they made that decision on two occasions, one on immigration and one when President Biden wanted to waive the student loans. The student loans waiver was blocked by the Supreme Court, saying that's a major question. And therefore, by the major question doctrine, it needs to go back to the Congress. ( Chief Justice Roberts has championed the Major Questions Doctrine – a principle requiring Congress to provide “clear and explicit authorisation” for executive agencies to regulate matters of vast economic or political significance.”)

So, while the other Supreme Court justices in various ways were questioning the validity of IEEPA, the Chief Justice wasn't. He was questioning whether this has major consequences. If it has major consequences, then by the same principles in which we have ruled in two other cases, it needs to go back to Congress. So, the chances are that even if we don't have a ruling, IEEPA will most likely, and that's what most legal experts say. Now, what happens after that? So, if IEEPA is made invalid because none of the trade deals have been passed by Congress, they are not trade agreements. If they're not trade agreements, then the basis on which you have made the trade deals falls through. Therefore, the trade deals will have to be redone.

They are just trade deals signed between two governments that have not been validated by either country's legislature or parliament, and they are not trade agreements. So, the first thing that happens is that all the trade deals necessarily become invalid.

The second thing that happens, which is the other thing that the Court of International Trade said, was basically that because IEEPA is not the right way of imposing these tariffs, all tariffs collected will have to be reimbursed. So, roughly, we are looking at our calculations about $165-$170 billion of tariffs that have been collected under IEEPA.

The problem with all of this is not that the equity market will have a problem. It's the bond market that will have a problem. Because the bond market right now is still looking at the fiscal deficit for this year, 2025, and fiscal deficit for next year, 2026, based on roughly around $250-300 billion of additional tariff revenue that is not part of the budget that was part of the One Big Beautiful Bill. The tariffs were not part of it. So they look at the budget deficit under the One Big Beautiful Bill and add the $250 billion, which is the tariff revenue. They got the tariff revenue.

Then the second thing that happens is the bond market says, "Well, the fiscal deficit is now $170, $180, $200 billion more, both for 2025 and 2026. So suddenly, the very calm, benign, and very controlled bond market will necessarily react.

Well, the next steps are that they go back to the several other trade acts that allow the President to impose tariffs. Section 122 allows the President to impose a 15% tariff for 150 days. But there are problems with it. The problem is you can't give exemptions to categories.

The other problem with Section 122 is that it says that, because you have a free trade agreement, it cannot be an exception. You cannot say that I have a problem with my balance of payments. There are these countries that are running these massive trade surpluses with the US, which is why we have a balance of payments problem, which is why we are imposing a 15% tariff for 150 days. But we are exempting the two largest countries that run trade surpluses with the US, which happen to be Canada and Mexico.

That's what Trump has been doing.

That's the easy way out. So yes, there are ways out for the US. That means that tariffs will go down. Tariffs will probably be able to go back to the same level as we have right now, but there'll be very different tariffs, which will affect different countries differently. On top of that, it will affect different items differently. And the impact of these tariffs on US revenue, tax revenue, and tariff revenue will be very different.

How do we see India's position in this whole scenario? And how do we bring stability to our trade policy when dealing with the US?

So one of the things that will happen if IEEPA is made illegal is that IEEPA, by itself, was the basis for the 50% tariff. There is no trade act in the US that allows a president to impose tariffs on a country because the tariffs brought oil from Russia. There isn't any. The tariffs can be imposed only if you can show that they have harmed US competitiveness or the industry. You can't just simply say: Because of geopolitical expediency, I'm imposing a tariff, which is what they've done using IEEPA. So that goes away. But just because that goes away, that doesn't mean that there is any real relief because the US will come back on India now using 232 and using Section 301.

As I said, Sections 301 and 232 are cumbersome. They take a long time to put in place, but they can be put in place. And if you look at the tariffs used under 301, which were China's 2018 tariffs, they didn't go away under Biden. In fact, under the Biden administration, they were intensified, increased. So Indian exporters might get a brief relief while the US Department of Justice and the US State Representative Office are trying to put together the 301 tariffs on India. But those tariffs are going to be back on India. They may not be a blanket 50%, but they might be 75% on something, 25% on something, 10% on something.

But I do think that the overall tariff may not be 50%, but I don't see them going back to what it used to be before all of this had happened. So yes, there is a relief. You can breathe a little easier for a few months, but the tariffs are going to be back. And the reason why the tariffs are going to be back is that let's look at what India has itself done over the last 10, 15 years. India itself has gone and increased trade barriers and tariffs. And it is not just that I'm saying this.

The previous Chief Economic Advisor, while he was in the office, talked about it, Arvind. The current Chief Economic Advisor, as he is in the office, has talked about it. You simply can't keep on increasing trade barriers and expect nobody else to react to it. India has increased trade barriers. The import tariffs of India's import tariff regime today are significantly higher than they were about 15 years back. So if you do that, then countries will react.

So, there's a greater degree of protectionism in India, and that's what's playing out against us at the moment with trade agreements and deals.

It has been going on for the last 10 years. Because it was protectionism by us, we didn't care about it. But there is always a price to be paid. I will give you a much simpler example, which doesn't have to do anything with protectionism. We have protected the Indian vineyards and wine industry for the last 50-60 years.  But imposing massive tariffs on imported wine. I'm not talking about liquor, I'm just talking about wine. What has that got India? We do not even have, after 60 years of protection, we don't even have a wine industry that can match the Argentinians and the South Africans of the world. Forget about Australia and New Zealands of the world.

So, you have described a significant shift in the US foreign policy, back to the Monroe Doctrine and spheres of influence. So, according to you, how should India reposition itself as a strategic partner if the US also continues to retreat from internationalism?

We want to balance everything else. We want to balance the US on one side, China on the other side, Russia on the other side, and the European Union on the other side. But we also want to keep our regional influence intact. It isn't that India did not have a Monroe Doctrine. We also did the same thing. As long as our region, our subcontinent, was within our influence, we were happy.

So, if the US shifts towards regionalism, which is, look, Western Hemisphere is our backyard, don't touch Western. In the other places, the big superpowers can do things within their own sort of limits; we'll be okay with it. Which is why they're sort of exiting out of Europe, they have exited out of Asia, which allows both Russia, China, both of them much greater freedom, if all of this passes. I don't know whether it's going to happen or not. If all of this passes, there will be much greater freedom to impose and exert significantly more regional influence than they had been allowed to do otherwise.

In that world, India will have to rethink its objectives, rethink its position. It is no longer the case that, because India is a buffer against China, therefore US will treat India differently than any other country. That hasn't worked. Today, India has the highest tariffs, even higher than China's.

You simply cannot keep on raising trade barriers and not expect your trade partners not to react. Just because your trade partners have not reacted in the past, that does not mean they won't do it. Sooner or later, your trading partners will react, and they reacted. Now, I'm not saying that justifies a 50% tariff or whatever it is.

What are the imperatives that the government must address in this budget?

My own sense of what the budget will do is that they will meet the 4.4% deficit target this year. It may not be very clean, because tax revenues are declining significantly due to nominal GDP falling very, very sharply. And because of the rates coming down on GST. But I think they'll make it up for slow spending and getting revenue from the usual sources, RBIs and public sector undertakings. And the next year, they're going to target a budget deficit which is lower than 4.4%. Because there is a deep economic imperative, that's what they should do. The deep economic imperative will be the same old thing, which is, well, we want to reduce the imprint of the government in capital markets, so the private sector can have more breathing space.

This is a fiscally conservative government, and they think that targeting a lower fiscal deficit is a big tick mark on their achievements. And they'll do that. So, we are looking at about 4.2% target with a nominal GDP of only 8%, or let's see, lower. You don't have very much space to do anything. So, what space can you create? Not very much. The space that can be created is outside the purview of the budget, per se. It is in the capital market reforms. That is where the finance ministry needs to focus. And I haven't seen any major capital market reform in the last, I have no idea, I mean, 10, 15 years.

So, capital market reforms to enable more retail investor participation, or what should they be targeted towards?

Let's look at the problem. So, India's GDP has at least doubled, probably more than doubled over the last 15 years. In this doubling, look at the top 10 listed companies in any sector, apart from telecom, where there has not been a single new entrant in the industry leadership. How is that possible? There are a few hundred thousand startups.

Where is one startup in the top 10 ranking in any industry? Take any industry, give me a startup that has made it to the top 10, not one, including the payments and the delivery startups. They are not number ones in logistics, in the top 10 of logistics. So there is a problem that while there is a massive amount of entrepreneurial interest in India, where everyone is going around trying to look for the new breakthrough, albeit almost entirely concentrated in services and almost nothing in manufacturing.

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I mean, there's a smattering of electric vehicles, whether your motorbikes or cars and probably some in defence technology, which are manufacturing, quote unquote, the rest of them are all in services and there's a reason for that as a separate issue. But what happens to them? I mean, startups are not something that happened only two years ago. Most of these startups are from the last 10 years we've been hearing about startups. If in 10 years’ time, a startup does not make it in the top 10 in any sector, you need to ask the question, what is going on over here? And I think one of the reasons is the capital market.

In India, you can get VC money, you can get private equity market to start a startup. You have public money, retail money, and institutional money to take that startup and do an IPO. What about the money in between? You will require money for a three or five-year period to expand the startup to a point where the IPOs are not $10 billion, but $100 billion.

And that is where the capital market reforms come into play. Three, five-year money is available to uncollateralised startups.

I want to ask you about reviving FDI and FPI investment flows in India because we've seen an exodus of sorts in the last few months.

So there are two parts to the question. One is FDI, the other is FPI. So let's separate the two. On FDI, look at growth inflows. Growth inflows haven't really dropped off. Growth inflows have slowed down, but they haven't been as dramatic as net FDI inflows have been. Our last part of that is because all of these IPOs that you're seeing, and we are jubilant about the fact that we are having all of these massive IPOs. Most of those IPOs were actually funded by foreign private capital and foreign private equity. And they're taking the money out. So the question that needs to be asked is, why aren't they reinvesting that money in India?

That money has been taken out. It's not being reinvested. We have a 7-8% growth rate. There is not a single economy in the world with that kind of official growth rate. Let me rephrase it. Official 7-8% growth rate. Not one country. So how come they're not going there? So that's my question. So, FDI isn't so much that FDI is coming down. The foreigners or the MNCs are not bringing money in. It is that those who have been in India for the last 10 years, now that they are able to monetise their investments, are not coming back, are not reinvesting. It's a completely different problem. The second part is about FPI. So India's main market is the equity market. It's not the fixed income market.

Look, as I said, look around India's equity market. Give me a company that is valued, let's say, at $5 billion, $10 billion today, but has the potential of becoming a $500 billion company in the next 10 years. Give me, name me a company. One company. We don't have any. See, if you don't have any such companies, people do not invest in India. Only hedge funds and fast money invest in India by buying the index. People invest in companies. Give me a company that is valued at $5 billion, $10 billion, that has the potential to go to $500 billion. Money will come in. Right now, there are no companies. You have very, very mature companies for the last 40, 50 years, whose potential going up is very limited. You bring $1 billion a week to India; the Indian stock market gets overvalued. The moment it gets overvalued, the trade is killed. You cannot have a market that gets overvalued by $5 billion of money coming in. Then what is the trade? There's no more trade left. I need to have a market in which I bring in $5 billion, but there is another potential valuation gain of $100 billion. Then I'll bring the money in. But this is not just the case in India.

In the emerging market world, if you take out China, there isn't any emerging market world, any country that has any company of this kind. And there's a reason as to why this idea that people are junking US assets and moving elsewhere, that's not true. It hasn't happened. Even if it does happen, it will take a very long time.