Subramaniam points out that India lacks the financial leverage of Japan or the EU to promise significant investments in the US for job creation. While India can’t match Japan’s $500 billion pledge, tariff reductions on American goods are negotiable. A potential three-part deal could be explored, but India is unlikely to eliminate all tariffs on American exports.
I was just talking about Minister Goyal’s speech that India will never compromise on its interests. What is the kind of impact you are anticipating when markets open tomorrow? Has that speech reassured investors on what is to come?
Sunil Subramaniam: I think so. The maturity of both the Indian reaction through the press release as well as Mr Goyal’s comments indicate that we are not reacting to the words of Mr Trump which sounded very provocative. We are not getting into a jingoistic mood saying why can he do that. At the same time, we are sticking to the facts that there have already been five rounds of talks and now there will be one more round of talk. We also spelt out the position.
What is probably becoming increasingly clear in hindsight today is that neither India’s or America’s stance has changed from day one. That is why there have been five rounds without any success because the red lines for us in terms of agriculture, dairy, and genetically modified foods have been there right from the beginning and the US clearly was looking for India’s market opening up. India is a very polarised market, we have the largest middle class in the world, just ahead of China, but 10% of our population counts for 60% of our national income. So, it is a polarised market.
So, for the high-end products which America supplies, we were willing to open up to a Harley-Davidson bike, a Tesla, or high-end liquor which were accessible only to 10% of the 150 crore people that is a 15 crore market. But the US clearly wants the big share of the pie which is where agriculture was very important. Both the teams have been very clear from day one and so not much progress has been made and probably they have been nibbling around the edges so far.
It was clear that Mr Trump’s tweet was driven by the fact that with only a couple of days to go before the deadline, nothing much had moved. Talks are going on. It is a good sign because they are willing to talk but clearly with India being a democracy and a political landscape with the majority of the population living on subsistence farming, it is very hard to accede to the US’ demand and that is a red line.
I think it is not going to be easy to form a solution but it is good that the government has responded by saying that we will get back to the table and talk and they drew attention to the fact that with the UK, we have been able to achieve some kind of an agreement and that is the lighthouse around which we would seek future agreements including with USA. So, that has been pretty clear. The question that you asked is, whether it is going to calm the waters? Yes, because he also said they are going to be consulting with Indian export sectors to understand. So, they are clear that they do not want any sector to be harmed and they want to carry everybody along with them. So, we have adopted a very mature and pragmatic approach. That indicates things could be kept in abeyance and Mr Trump also subsequently seems to have kind of retracted by saying that talks are going on. So, let us see. Clearly there is a window open there too. All in all, it was good that he came to the parliament and addressed the parliament which is very important because the Opposition had latched on to Mr Trump’s tweets and started piling onto the government. All in all, a very mature and well-handled situation.When the Indian market opened, there was a sea of red across the sectors. What really changed after that because we did see pockets of green. How did that investor sentiment change, what really explains that?
Sunil Subramaniam: There are two-three things here. First, this happened overnight. So, obviously, there were a lot of retail players who were panicking and selling down on export-oriented sectors like textiles and that started it off. But remember, it was an expiry day as well and as the day panned out, I suspect because FIIs had been consistently selling, there was some element of shorting in the market. So, some short covering because of expiry day came in and started supporting the market.
The third aspect is that FIIs had been selling right through the month. So, they probably had an inkling that the BTA is not really going India’s way and there were other factors around the FIIs selling which was China looking very good from a valuation and a growth upgrade perspective. China’s growth is now projected to go sharply up to 4.8% and the US interest rates also continue to remain high because the Fed is avoiding any talk of a rate cut and so the US becomes an alternative option. These circumstances made FIIs sell and the incremental selling today was consequent to the Trump tweet and was not that elevated.
Finally, domestic institutional investors are sitting on surplus liquidity of about 5.5% and even the mutual fund assets of the management, the cash lying on the balance sheet is on a Rs 45 lakh crore base. So, to that extent, there is money in the hands of the domestic mutual funds and other players and such panicky corrections are the ideal buying opportunities for them. The Indian market because of domestic buying support has not become cheap at all.
Despite the FIIs selling, we remain reasonably overvalued in relative terms to other emerging markets and to our own history. So, from that perspective, for DIIs to deploy the cash any such correction is a wonderful opportunity. They have gone and bought sectors which are not directly impacted by any tariff related uncertainties. So, FMCG and banking in the middle recovered a lot. So, they were looking, parking their money closely around this and the final point is that some of the results have started filtering a bit more positively like L&T’s result yesterday.
Somewhere between the capital goods and the investment cycle, it looks like there is good news and 80% of India’s economy is domestic driven. It is only 20% which is externally exposed. Ultimately, for a domestic fund manager, while the tariff is a noise, there is a clear path that with the supportive fiscal policy, and supportive Reserve Bank’s monetary policy as well they gave away a big dividend and there is a CRR cut due to start shortly and monsoon has been good.
So, there are a lot of positive factors surrounding the domestic environment which domestic fund managers are well aware of and when there is some correction in good quality companies, those which have earnings guidance which is good, they have stepped into buy. It is a combination of all of these things that finally led to and markets ended in the red. But it is nowhere close to where it started off. The recovery can be attributed to actions of domestic fund managers.
In terms of what the investors are pencilling in so far as a trade deal between the United States and India is concerned, we are given to understand that both the teams are still negotiating. Are you anticipating some sort of a deal or understanding being arrived at over the next couple of days. Or will investors have to wait till August 25 for some clarity to come in?
Sunil Subramaniam: I do not think anything is going to happen in the next couple of days because it will be a big climb down for Mr Trump to have announced something and in two days to take that back. He has been willing to take it back in the past. Japan is a classic example of his going back, reversing his whole stance, yes, but I think two days is too short a time.
I do not think the market is expecting anything in two days. In fact, the market is expecting a three-phase deal. By August 25th stocks, maybe by September 1st, after those talks, you will see an easy things being gotten out of the way. I would call that as an interim deal. And there will be a phase one deal which will take another three months where a little more difficult to be tackled and probably the big key ones would probably take the rest of the year to solve.
So, it is a three-part deal. But what India will be looking for and here is that, I think that they will look for a parity in tariff with our competing countries for the products that we export. So, what comes to mind here are textiles, leather, gems and jewellery. Which countries are we competing with and we will want a level playing field. Ideally, we would love an advantage in tariff vis-à-vis them but in the worst case if you get a level playing field, then our domestic industry is protected because the situation was what it was before.
So, give us a level of tariff at which our industry can have a level-playing field, I think that will be an easy win from the Indian perspective for which the second aspect here is buying the oil. I know that Russia is a sticking point, but I do believe that it is more of a bargaining chip because Mr Trump knows very well that India is importing 85% of its oil.
If you do not buy from Russia and you cannot buy from Iran, then what do we do? So, we are in a very difficult situation if we agree to that. So, at no point of time will we consider that, but what we can agree to is to buying a significant proportion of energy from America and there the sticking point will be the increased transportation cost because Russia is very close to India in terms of geography whereas American oil will probably need to be shipped across thousands of miles.
So, there will be a differential cost and India will seek a level cost to what Russia is offering. Russia used to give us a huge discount in the initial days of the Russia-Ukraine war and India was also paying them in rupees, but now those things have gone and now Russia is more or less pricing it closer to a commercial market price. There is still a bit of a discount but what we would try and get is that we will tell the US that we can buy the oil from you, but do not make us pay additional cost. That is again something which I suspect would be an easier to solve situation.
Third is a commitment that over a period of time, we will look at American defence equipment incrementally to Russia. It is not like we will stop buying because we already have over the last 30-40 years been buying from Russia. We need their spare parts and the upgrades on those. We cannot just condemn our entire arms and ammunition to the sheet and say we will rely on the US. So, we will tell the US that we will look at buying some advanced defence equipment from you. So, these are the ones which can easily get out of the way.
The one important card which we do not have which Japan and probably Korea to some extent or EU has is we cannot promise to invest big bucks in America. We do not have that kind of money. Japan promised some $500 billion of investment in America to create jobs but that is not a card that India has. Yes, to a limited extent, some auto components can be shifted to the US, but we do not have that kind of a bargaining chip of a huge amount of capital we can commit to creating jobs in the US and that is one of the weaker points in terms of India’s negotiations because Trump has won that from Japan.
The other thing is that Europe for example has pretty much sold their soul to America because they have put zero tariffs on American exports into the EU and accepted a tariff on EU exports. I do not think India is ever going to try to do that saying we waive all tariffs on America. But a reduction in tariff on American products being sold to India is very much within the ambit of a negotiation. So, I see a three-part deal.