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Swaminathan Aiyar's analysis paints a concerning picture for India's economic future, particularly regarding the potential resurgence of trade wars under a second Trump administration. Aiyar anticipates a series of escalating tariff and non-tariff barriers globally, directly impacting India's trade relations. He highlights Trump's past criticisms of India's tariffs, specifically mentioning high tariffs on motorcycles, as a potential flashpoint for future trade disputes. Aiyar's pessimism stems from his belief that Trump genuinely advocates for tariffs as beneficial to the American economy, rather than employing them as a mere bargaining tactic. The uncertainty surrounding Trump's unpredictable policy shifts further exacerbates the risk, creating an environment where investors may pull funds from emerging markets like India, driven by a flight to safety towards the US dollar. This potential capital outflow would represent a significant challenge for India's economic stability and growth trajectory.
Beyond the external threats, Aiyar's perspective on India's upcoming 2025 budget suggests a focus on continuity. The BJP government, having successfully secured re-election on a platform of sustained policies, is expected to maintain its existing economic course. Finance Minister Nirmala Sitharaman's target of reducing the fiscal deficit to 4.5% in FY25-26 is likely to guide budgetary decisions. A continued emphasis on capital expenditure, potentially extending the Production Linked Incentive (PLI) scheme to more sectors, is also anticipated. Although Aiyar expresses some reservations about the PLI scheme's expansion, he predicts the budget will largely prioritize maintaining current economic strategies, focusing on initiatives already in place and deemed successful. He expects incremental adjustments to support domestic manufacturers and strengthen value chains within the 'Make in India' initiative.
Aiyar's analysis also touches upon the role of the Reserve Bank of India (RBI) in navigating the current economic climate. He suggests that the RBI's capacity to influence the exchange rate is limited, given the substantial offshore market activity. The strong performance of India's service export sector, rather than merchandise exports, is currently the primary driver of the rupee's value relative to other Asian currencies. Aiyar doesn't foresee significant changes in RBI's monetary policy in the near term. Given the persistent inflationary pressures, particularly food inflation exceeding the RBI's target range, interest rate cuts are unlikely, at least within the next few quarters. Aiyar emphasizes that food inflation in India often impacts overall inflation, requiring the RBI to consider the total inflation figure rather than isolating food prices. The current economic situation does not favor monetary stimulation. Aiyar projects a modest recovery in GDP growth for the current fiscal year, estimating a rate around 6.5%, citing factors such as government capex recovery and a positive manufacturing PMI.
Looking ahead, Aiyar acknowledges that future economic performance depends heavily on global developments. A potential peace deal in Ukraine or a substantial US tax cut could positively influence the global economy, potentially benefiting India. However, a worsening global situation, driven by trade wars or other unforeseen events, could severely impact India's growth prospects. Aiyar concludes by contrasting the current economic context with the circumstances under which Manmohan Singh initiated economic reforms in 1991. He underscores that the present environment lacks the same kind of crisis that allowed for drastic policy changes then. In his view, the current political climate doesn't offer the same freedom for radical economic reform, highlighting the need for strong leadership to drive significant policy shifts. In essence, Aiyar concludes that unless a substantial crisis emerges, major changes to India's economic course are unlikely in the foreseeable future.