After the decision of the United States to hike duties on steel and aluminum imports, India has decided to retaliate by raising import duties on about 30 products from US. This is not a good news for the Indian currency. The rupee has been depreciating for quite some time now because of trade deficit and higher current account deficit. The support from the foreign inflows is also waning because of higher stock market valuations, hardening of interest rates in US and also money tightening news from the European Union. Here are four reasons why an escalating trade war with US will further weaken the currency value against the US dollar.
United States is one of the largest trading partner
China is India's largest trading partner and in 2017-18 the total trade between the countries amounted to $89 billion. US comes second in the order, with total trade value of $74 billion. This shows that the US is a very big trading partner of India with both nations having exports and import relations for decades.
India runs trade surplus with the US
Though China is the largest trading partner of India, the country has a negative trade balance with China. Which means that India's exports to China are lower than what China imports from India. So this trade is very favourable for China. But in case of the US, India runs a trade surplus. India exports more to US than what it imports from US. The trade with US is very favourable for India, which means we export more than we import from them. This brings much needed dollar inflows into the country. If the trade war with US escalates, this will widen our trade deficit and also current account deficit.
Domestic industry will be hit
An escalating trade war with the US has potential to impact the domestic industry especially pharmaceuticals, apparel and textiles, iron and steel, mineral fuels and also fisheries. All these industries are manpower intensive. At a time when unemployment is a big issue in India and economy is also slowly coming back to normal, a trade war with US will impact the economy's growth momentum. In fact, investors and mutual funds in the market are betting big on pharmaceuticals as this sector hasn't participated in the rally in the last 2-3 years. If any duties are introduced, this sector will see some bloodbath in the stock market, which will push the stock valuations lower.
India's import items from the US are critical
India's highest imports from US are very critical in nature like nuclear reactors, boilers, mineral fuels, aircrafts, space crafts, medical equipments etc. Any higher duty on these products will impact India's key sectors. While the US or its companies could absorb the impact, India and Indian companies don't have the kind of strength, which a developed country has to absorb the higher costs.