There’s a big, non-obvious Trump problem for India

medium nocaption118083035Donald Trump’s initial tariff tactics have provoked a heated debate. Optimists highlight his holding off temporarily on 25% tariffs on Canada and Mexico. Pessimists, including me, think he worships tariffs, and will use them repeatedly. He has proved his utter unpredictability and willingness to slap even close allies.After the Budget, I met some businessmen in Mumbai. They were mainly optimists. They expected uncomfortable moments from Trump, but thought these would be settled without much damage by concessions from India. They did not see a major setback to India’s growth prospects.Modi is visiting the US and is expected to meet Trump on February 13. Many hope Indo-US relations will be put on an even keel after a few tariff concessions from India. The Budget has already cut Indian tariffs on all significant items imported from the US, including luxury bikes such as Harley Davidson (from 50% to 40% for up to 1,600 cc).After their last meeting, Trump called India a tariff king. India responded by cutting the Harley Davidson tariff from 75% to 50%). But recently, Trump said India tariffs must be as low as US tariffs (around 4% on large bikes) to stop the crucifixion of the US by unfair trade practices. Let us see what answer Modi gives. The big mistake commentators make is to think that the problem is a bilateral one of tariff rates. Not at all. A much bigger problem is the indirect impact of Trump’s chaotic, unpredictable policies. Unpredictability will kill animal spirits of business across the world. ShowQuotesEconomist Keynes coined the word ‘animal spirits’ to describe how risk-taking entrepreneurs were ambitious, innovative, and even reckless by conservative business standards. In the process, they made their economies more dynamic and fast-growing. Animal spirits, said Keynes, spurred fast growth.Trump uses chaotic decisions and revisions as part of policy, not confusion. He wants to keep surprising people. This is reminiscent of poet TS Eliot’s line, “In a minute there is time for a hundred decisions that a minute will reverse.”Chronic policy changes and revisions are terrible for business globally. When uncertainty is high, business hunkers down on new investment, avoids risk, and waits and watches. That will suffice to seriously slow global growth and exports, and India with it. mediumhttp://www.youtube.com/watch?v=ixzvAJ5Yo_EIf India’s GDP growth falls from the Budget projection of 6.5-7% to 5.5%, revenues will slump, fiscal deficit will widen, private sector will slow investment, and markets will sink. Global money is the most sensitive to risk. Trillions move if risk expectations change even slightly. Global money views emerging markets as risky, and the US as the ultimate safe haven. So, since October when Trump’s victory in the presidential election looked very likely, huge sums have exited emerging markets for the US. This has sent the rupee plummeting, from Rs 83 to Rs 87.5. The exit of foreign institutional investors (FIIs) from stock markets has sent the Sensex and Nifty down, with some stocks falling 30-50%.Market has dealt with such plunges before and is not fearful right now. Indian mutual funds have been collecting and investing large, reliable sums every month from the middle class through systematic investment plans (SIPs). These have, in recent years, kept the market up despite FII withdrawal. But maybe no more. The annual return on SIPs turned negative in 2024, and SIP inflows have dipped. This is an alarm signal. ShowQuotesI have long said that valuations in the US and India are crazily high, and in bubble territory. A recent international comparison measured market valuations through the price/book ratio cyclically adjusted. The top two countries by far were the US (5.2) and India (4.9). Much lower came the UK (1.8), Japan (1.6), China (1.3), Korea (1.0), and Hong Kong (0.8).This indicates that the Indian market could fall by half and still be well above all others, save the US. This is, of course, a worst-case scenario. Let me be clear, I am not predicting a worst-case scenario. But things could go badly wrong as long as Trump rules.Note, this analysis is not related to any specific tariffs by Trump against India. That matter may be settled at some minor cost to India. The real problem is non-obvious. It arises from the very unpredictability of Trump and its debilitating impact on risk perceptions and animal spirits. Financial markets, in particular, are places where enormous sums move at the slightest perception of risk. So, dollars may keep exiting emerging markets like India, depressing their currencies and stock markets. How far they fall depends on how far Trump goes for the next four years. And that is something that even he probably does not know.