Noted economist Sajjid Z. Chinoy, Managing Director and Chief India Economist at JP Morgan, feels no matter what progress the US makes on trade deals, the global economy will experience some pain. Edited excerpts:
What is your reading of the trade situation, given that India is in talks with the US?
I think there are always opportunities in a crisis, and that’s what we’re seeing from the broader global standpoint. It is transformational in the sense that we’re seeing supply chains getting rejigged like they haven’t been in 20 or 30 years. The global economy went into this trade turmoil on a relatively sound footing, despite all the noise around the US economy contracting in the first quarter. But I think we should not underestimate what both the near-term hit to global growth is going to be, as well as the medium-term opportunity for India. There’s a lot of expectation that the US will sign bilateral deals with many countries and large trading partners.
I think India is on a very good footing. Even if the US were to succeed at many of these trade negotiations, we’re still looking at a universal tariff of 10%, and sectoral tariffs on aluminium, steel, and auto. Our sense is this sets up the US for a recession in the second half of 2024. The fact is these deals are going to take several months or quarters to be completed. Until then, there’s most likely going to be an investment freeze around the world. So, in the near term, we should brace ourselves for a pretty sharp slowing of global growth.
Are you factoring in a possible extension of the 90-day pause?
I think it’s very likely that there will be an extension. What the US authorities have said is that those countries negotiating in good faith will be given further extensions. While there could be some relief, we’re basically dismantling a global trade system. You’re going to have 50 different tariff rates for different countries, lots of trade destruction, lots of trade diversion.
Are we in a position to effectively replace China in the global value chain?
There’s a huge opportunity for India. I would say this is a generational chance of export-led growth. This is because there’s a very important distinction between the first trade war of 2018 and this one as far as India is concerned. When tariffs went up on China, and there was a focus on ‘China plus one’, the large beneficiaries were Southeast Asian economies because they were very integrated with the Chinese supply chain. This time around, they’re going to be painted largely with the same brush as China. We’re not so linked to the Chinese supply chain, so there is a hedge. And India has a large market. Therefore, I think that multinational companies will look at India as being the hedge in the region to China and Southeast Asia. That’s where India’s real potential and prospects lie. There are very powerful push factors going our way, but we need to complement and close the deal by focusing on pull factors to bring that investment to us.
What is the downside risk of other trade deals not panning out?
This is a world marked by heightened levels of uncertainty. For India to stand out, we must be a beacon of stability, consistency, transparency, and reform. Therefore, it’s important to show that the India-US trade deal is not a one-off. To the government’s credit, the last two Budgets spoke of the need for export-led growth. This is no time for export pessimism.
How does our policy balance the demands for protection from domestic industry in the current scenario?
The bar for providing protection should be very high because if you look at India’s history over the last 60 or 70 years, very often we’ve come across this argument of infant industry protection for a few years.
From a political economy standpoint, that rarely happens. Once the protection is put in place, it’s very rarely withdrawn. What that does is it breeds relatively uncompetitive firms and sectors. The lesson of the last 20 years is very clear, that when you compete with the world, you also become far more efficient and productive. That’s the model we should pursue: make in India for the rest of the world.
How are inflation and growth likely to pan out in the medium term?
In the past few years, we’ve had low core inflation. Food inflation was the real irritant for about 18 months. The good news is that it is behind us. Crude prices are down to the low $60s (per barrel). All of this is going to be very disinflationary. Chinese excess capacity is also going to be disinflationary for the entire region. We’re looking at inflation being very close to the 4% target. That’s going to free the central bank to pursue monetary easing. And we’ve seen the RBI move decisively. But we need to be careful because there are growth headwinds to the Indian economy like there are to the rest of the world. One is the potential slowdown in exports. But the bigger focus area will be investment, because we’ve all been waiting for the private investment cycle to pick up.
In a world with heightened uncertainty, it’s understandable why the private sector may wait a little more before investing. That’s what I worry about. That’s why it’s important that we use the instruments we have: monetary and fiscal policy, where I would say it’s really important that we continue with the public investment thrust.
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