Policy uncertainty due to tariffs seems to be the big takeaway now. How does the data for India look to you via-a-vis its peers and of course the western countries that the IMF mentioned?
Swaminathan Aiyar: All that the IMF is saying is things are not looking as bad as they looked in April. If you remember, there was a higher estimate of 6.5% which came down to 6.2% and is now up to 6.4%, and that is still down. But this is a highly-highly provisional estimate. The truth is we do not know what is going to happen in the USA under Mr Trump on the supposed August 1st deadline. Some people say August 1st will be followed by a September 1st deadline, followed by an October 1st deadline and that Trump always chickens out.
There are a large number of uncertainties. Although it does appear that whatever may happen, we are not going to have those crazily high duties initially suggested. Nevertheless, the kind of increase that we are going to see especially in areas like steel and aluminium and in autos would be very considerable. We have to wait and see how this game plays out.
In the first quarter things have been surprisingly benign. The major reason, of course, is that many of the proposed tariffs have been put off. So, the kind of slowdown you expected has not taken place. Secondly, it is also quite clear that Trump is right in saying that the United States has a monopoly. It has a huge purchasing power and it can exercise this purchasing power to demand a lower price from other people through the higher tariffs that it has imposed, and it is getting away with that and there appears to be very little slowing of its own growth but they are going to get $300 billion in import revenue if this trend continues. So, things have not been as bad at all for the USA.
The stock markets in general are saying forget about current negotiations in Mr Trump, we will look through all this to the longer term trends which look to us fairly favourable. We will come back to the tariffs issue after two things – first, because there was a lot of stock piling of goods in America immediately after Trump’s victory because they said tariffs are going to go up, so lots of people started buying inventories at cheap prices saying they will go up after Mr Trump comes in. Now that inventory effect will play out after maybe six-seven months. Till then, because of the high inventories at low prices, the inflationary impact on the USA, the rest of the world is less. But as the months go by, gradually you will find the impact of the tariffs getting higher and higher. The inflation in the USA will become higher and higher.
The Chinese dumping of goods that they cannot sell to the USA, may get worse and worse. So, there are a large number of unknowns right now. Markets are looking through this right now saying that we will cross that bridge when we come to it. But at this point, the one thing that we can say is that things look better in July than they looked in April and that is a yes. So, for now things are not turning out as bad as we thought. But wait and watch, there are many-many dangers on this path.Let me come back to the point about global growth projections. The IMF’s projections are not very different from RBI’s growth projections which had mentioned that GDP is expected to grow in the 6.2-6.5% range. How do you look at the quality of this growth? Is this growth percentage enough?
Swaminathan Aiyar: Everybody is agreeing that India is a highly resilient economy which has taken so many shocks in its stride. Now whatever is happening is a shock. There is a Trump shock. Post Covid, in 2023 the world was on fire, as Larry Summers said and in that year, the revised growth figure for India was 9.2%. So, when the rest of the world was burning, India did 9.2%. So, there is no question that when conditions are bad and all our neighbours had to run to the IMF for help, India did so well. So, there are a lot of fundamentals which are clicking for India right now. That means that no matter what happens India should be able to do quite well. The world economic outlook overall may have improved compared with April, but the overall outlook is certainly slower than it used to be as was said by Mr Pant. The world is nowhere near as euphoric as it was from 2000 to 2020 when things were much better. Of course, China in those days, was growing in double digits, and is now down to 4-5%. All I can say is yes, the whole world’s growth has slowed down, and India has shown itself to be an exceptional performer.
But I would add that let us not take these projections so seriously and go into each decimal point because every quarter these things will be revised. We have no idea at this point where exactly US tariffs are going to end. We have very little idea of to what extent exporters will be able to absorb the effects of the Trump tariffs, and to what extent, they will be passed on and thus cause inflation. If that happens, will it then result in an American slowdown, an American recession even? Will it then lead to a very bad mid-term Congressional elections in the USA which will blunt Mr Trump?
Or on the other hand, will he get away with it and then continue further and further? Once upon a time, people used to say that the US president is not very effective in his last two years. But we have a new situation where we have a president doing everything by executive order. This has never been done before. Earlier you had to get congressional approval, other people’s approval. This guy just says every damn thing is an emergency and I know in an emergency I can do anything. We are also going to see the courts restraining Mr Trump in various ways.
You mentioned a lot now hinges on how August 1 is going to play out. What kind of disruptions are you anticipating specifically in the India context post August 1? Are you anticipating that a mini deal could be signed or are you anticipating a tariff in the range of 10% to 15% to come into effect?
Swaminathan Aiyar: I think we have been underestimating India’s growth potential. Two years ago when we did 9.2%, this was ascribed to the fact that there was an unnaturally low GDP deflator, but that should have worked the other way the next year when you got 6.5%. The average for the two years became 7.85%. Now if you are doing 7.85% and the world is on fire, something very positive is going on for you. So, at 6.4-6.5% and if the outlook is as good as the IMF thinks, then India may exceed that 6.5%.
On the other hand, if things get much worse, then India may still be able to exceed 6.5% and that would be my broad assessment given how well India has been able to do in this particular environment. Look at the macroeconomics: the fiscal deficit is well within control; the current account deficit is virtually zero. Inflation is down to 2.1%. The wholesale price index is in negative territory. The overall macro fundamentals are strong at a time when other countries are doing badly. It is very clear that India has some very solid underlying trends which are going to preserve it and I hope we will be able to exceed that target of 6.4%.
Now let us talk about the world and particularly China. The IMF has raised China’s growth forecast as well. But given the fact that China is largely an export-based economy and it could be perhaps at the risk of another trade war with the United States, is that projection that the IMF is giving at the risk of being revised?
Swaminathan Aiyar: The first thing I have to mention and people do not know this is that as a proportion of GDP, India’s trade is higher than that of China. So yes, it exports a huge amount because GDP is four to five times higher than us, but you would be surprised that India is more interconnected than China is. On the other hand, India does not have the Chinese problem, that capacities are being built with subsidies from provincial governments in China saying there will always be an infinite demand from the world market and that infinite demand has dried up. This game worked very well for 20 years. Now you have run out.
When you are already producing 200% of the world demand for solar panels, what is the point of having more provincial governments encouraging even more investment, even more production as they have been doing for some time? China is in some difficulty on the entire trade side. It is very difficult overall to see what is going to happen. Xi Jinping has paid attention to the fact of chronic overproduction and of too much subsidies from the provincial governments. But at the same time, he is unwilling to back off and say we have been doing the wrong thing and we need to completely change because if he does that, it will mean that large sectors to which loans have been given are going to get sick.
I saw a recent article on how the proportion of profitability of Chinese companies is steadily falling because the formula that worked in the old days that you just set up huge capacities and export the surplus is no longer working and they are going to be in some trouble and that is dragging down the entire world economy post 2020 and that is one reason why Mr Pant says that we are growing more slowly, yes, and a major reason for that is China is growing more slowly.