In 2025, India Must Navigate Trumpian Policy With Dignity And Without Getting Hurt

The year we leave behind has been one dominated by war, extreme climate events, political upheavals, disruptions accompanying the energy transition away from fossil fuels, and stock market frenzy. Artificial intelligence (AI) took investor intelligence for a ride, and all kinds of AI companies sport valuations that resemble a swollen boil waiting to burst, even as actually deployed use cases of AI are only as plentiful as the Great Indian Bustard.

In India, discovering buried temples on the premises of Islamic places of worship has become all the rage. Unless the government and the ruling party put an active end to this practice of digging up the past to bury the future, India will be racked by conflict that kills growth, the Idea of India, and ordinary people.

The biggest developments this year with implications for the future have, of course, been the re-election of one, Narendra Modi as India’s prime minister for a third term, and, two, Donald Trump as the next president of the United States. Indonesia and the UK held elections and voted in new leaders.

US Sneezes, World Convulses

Thanks to the centrality of the United States in the world’s technology, production and finance, rapid developments in the US exert influence on currency and interest rates around the world. With Donald Trump, the 45th President of the US, coming back as the 47th president, who will assume office on January 20, 2025, America’s impact on the world assumes a new, uncertain dimension.

Trump promises politics and policies radically different from those of the outgoing administration: large tariffs on imports, mass deportation of undocumented migrants, and another dose of tax cuts and deregulation. Tariffs and labour shortage would stoke inflation from the supply side; and a wider fiscal deficit created by tax cuts would stoke inflation from the demand side.

Higher inflation under Trump would call for higher interest rates to curb it. Fed fund rate cuts in the present and future likely rate hikes to curb inflation make US bond yields volatile, as also currency flows into emerging markets, whose currencies, bond yields and stock prices also turn volatile.

If Trump initiates a trade war, it would dampen global growth and reduce export opportunities for all countries. If Chinese imports into the US are walled off more than imports from other countries, China would find alternate markets for its erstwhile exports to the US, intensifying competition in these markets, including for India.

Trump and his vice-president articulate an isolationist vision for the US in the world. If followed through, it would lead to major geopolitical realignments, with the burden of adjustment a whole lot more on US allies in Europe and Asia, rather than on a country like India, which pursues non-alignment or multi-alignment, depending on the context.

The geopolitical centrality of India for the US as the only serious counterweight to China, in economic and strategic terms, whether actual or in the making, is something that does not depend on any individual leader’s whimsy. However, how that central core is layered with other policies could vary, depending on the choices Trump makes. His personal equation with India’s prime minister has not prevented him from railing against India’s high tariffs and how he would reciprocate that favour. He also did not pull any punches, when he threatened penal tariffs on countries that attempted to create an alternative to the dollar. Creating such an alternative to the dollar is part of the agenda of the G20 and of the BRICS.

Trump’s bark is probably worse than his eventual bite. But India and other like-minded countries have to navigate the space between growls and fangs with dignity and without getting hurt.

Even prior to the arrival of Trump on the scene, US influence on the rest of the world has been pronounced. The Federal Funds rate stood at 5.5% at the beginning of the year, and has been cut three times over the year, once by 50 basis points, to bring down the policy rate to 4.5%. Inflation in the US has been tamed, more or less, and growth remains robust, more robust than the Fed had anticipated. Instead of the policy rate being cut some four times next year, the prospect would appear to be of two policy actions next year.

Each Fed action and speculation over the likely next action move hundreds of billions of dollars surging across borders, moving stock prices and exchange rates, and constraining policy space for other central banks, particularly those in emerging markets like India. The dollar index, measuring the US dollar against six major currencies, had a 52-week low of 100.16 and a high of 108.54. It is near its 52-week high right now, and that means most major currencies have depreciated against the dollar. That explains, in part, the fall of the rupee to below Rs 85 to the dollar. Depreciating local currencies mean that imported commodities and energy go up in local prices, feeding inflation.

The Markets

India’s stock markets have zoomed. While the December indices are below their levels in October, compared to their levels in January, they are still about 10% higher. But corporate performance has been indifferent, and even the optimistic central bank of India, the Reserve Bank of India, has lowered its growth rates for the current fiscal year and the next one.

The indictment of Gautam Adani companies by the US markets regulator SEC for alleged corruption in renewable energy projects has caused a major loss in value for the group companies. Allegations by Hindenburg Research, an activist short seller that publishes damning reports on companies, on whose stocks it has already taken a short position, alleged that Madhabi Puri Buch, the chairperson of Indian market regulator Securities and Exchange Board of India, was in cahoots with Adani. While Buch has clarified specific allegations, she failed to appear before a committee of Parliament that had summoned her, to clear the air. These market disruptions notwithstanding, Indian stocks have done well over the year.

Taking advantage of that boom, a number of companies have raised fresh capital, including the South Korean auto major Hyundai, which sold off a slice of its holding in the Indian subsidiary. This has demonstrated India’s viability as a financial centre for capital raising by other countries as well. The IPO success has led to sustained financialization of Indian household savings, with more and more people from smaller towns entering the market directly or through mutual funds.

Japan’s decision to end its negative policy rate regime and raise rates unwound the carry trade, adding its bit to market volatility in 2024.

Gold has gained as a safe hedge. Thanks to Trump’s new love for bitcoins, cryptocurrencies have emerged as a significant alternate asset class as well.

Economic Performance

India’s economic growth has been less than spectacular, but thanks to the boom on the bourses, advance tax collections have been robust. A shift from unorganised to organised sectors of production ensured GST collections climbed steadily. If that sounds like good news, the flip side is the fate of the unorganised sector enterprises that ceded ground to their organised sector counterparts.

These would appear not to have recovered from Covid disruptions, depleting livelihoods and depressing incomes. The feeble growth in consumption registered last fiscal would appear to have carried over to this one as well. Growth is driven by investment. And that has proved scarce, with government capital expenditure sadly lagging revenue receipts and private investment hesitant, in the face of significant unutilised capacity in manufacturing and in the absence of any coherent policy for public-private partnership (PPP) in infrastructure outside renewable energy.

From real estate and automobiles to fast-moving consumer goods, demand has been rising for the premium segment of the market in sector after sector, even as the mass market has been malingering. The solution is to boost government spending, and create policy to channel private investment into broadbased infrastructure, abandoning the myth, electorally viable though it has been, that PPP is something the previous UPA government dreamed up to transfer public funds to tycoons and their political sponsors.

Europe Lurches To The Right

Europe has remained sclerotic, particularly in economic terms, for most of the year. Britain’s Conservative Party saw Reform UK, the new incarnation of the former Brexit Party, draw away a large chunk of its voters in the general elections this year, helping Labour regain power. Its leader Keir Starmer has an uncanny ability to speak entirely in cliches and platitudes. But, that apart, the new British premier seems entirely unremarkable.

Across Europe, there is a resurgence of nationalism and rejection of immigrants and would-be immigrants. The rise of the extreme right wing comes in tandem with inflation and the budgetary drain to support Ukraine that forestalls fiscal support for the inflation-afflicted. This means that centrist parties are on the back foot in Europe. The German government has collapsed. So did two governments appointed by President Macron of France. Politics is shifting or has shifted rightward in Sweden, Denmark, central Europe and Italy.

Gaza: From Slaughter To Exodus?

Israel continues its slaughter in Gaza, where the death toll has crossed 45,000. Israeli prime minister Benjamin Netanyahu’s allies from the religious right want to start settlements on the Gaza Strip and the West Bank as if Palestinians do not exist or do not have a right to exist. Israel has bombed Lebanon, Yemen and Iran repeatedly, to beat its opponents in these countries, mostly Iran-backed, into submission. Israel has emerged as the superpower of the Middle East, albeit a proxy for the United States, which arms it and gives it diplomatic cover.

In Syria, former jihadists have ousted the totalitarian regime of Basher al-Assad, stripping Iran of another ally. Russia continues to advance in Ukraine, despite western permission for Ukrainian forces to use their long-range missiles to attack inside Russia.

Turmoil In The Neighbourhood

Nearer home, Bangladesh overthrew the Sheikh Hasina regime and has put in place a caretaker government headed by development economist-cum-microlending pioneer Muhammad Yunus. The religious zealots of the Jamaat-e-Islami, which has the reputation of colluding with the Pakistani army at the time of Bangladesh’s liberation, have acquired new freedom to act. That might yet derail the new government.

Sri Lanka has thrown out the Rajapaksas and voted in a Leftist government that wishes to cooperate with India. Myanmar’s civil war continues. Bhutan and Nepal indulge their freedom to explore new degrees of autonomy between their two giant neighbours, India and China.

China is emerging from its real estate addiction, with all the pain of withdrawal common to all addiction treatments. At the same time, China has found success in its quest to master new technologies, in building ultra-fast semiconductor chips, and in areas of the energy transition, leading the world in electric vehicles, solar energy panels, and battery technologies.

Even as major powers — the US, Europe, Japan, South Korea and India — scramble to build their own semiconductor fabs, China has freed itself of dependence on American technology in chip manufacture, a major landmark in technological autonomy.

Climate Change Is Worse Than Ever Before

News on the climate front is far from reassuring. Extreme climate events — floods, forest fires, heat waves, droughts, superpowerful cyclones/hurricanes — wreak havoc. The climate conference this year at Baku saw more promises to dribble funds towards climate mitigation and adaptation, without making progress on the one sure way to prevent global temperatures rising 1.5 degrees Celsius above pre-industrial times: removal of the stock of 2,400 gigatonnes of carbon dioxide equivalent of emissions that human activity has belched into the atmosphere since the mid-19th century.

If carbon dioxide removal is recognised as the way to combat climate change, the responsibility for remedial action gets sharply defined: it lies with the countries that have created those emissions, essentially the rich world.

The current strategy of reducing additional emissions will keep adding to the stock of emissions, not deplete it, making global warming inevitable. Once the rich-world responsibility to clear up the mess it has created in the process of growing rich is firmly established, it would have to take the lead to find economical ways to remove carbon dioxide from the atmosphere. Instead of insisting on this remedy, India, self-styled champion of the Global South, has been trying and failing to take the lead in implementing the rich-world strategy of emission reduction, a shared responsibility of the entire world.

Clearly, 2025 is the time for India to correct its course in many areas, ranging from growth revival to finessing its response to Trumpian policy, and advancing along the path to technological autonomy of its own.