At the outset, one must note that it might be naive to view either a Trump or a Biden regime as unilaterally better or worse for India. Rather, both have pros and cons, and with varying implications over the immediate term vis-a-vis a longer horizon. Also, a Republican-dominated Senate may temper certain policies that Biden or the Democratic party might like to pursue.
Stimulus, recovery, risk assets
As the new President looks set to take charge in early 2021, the expectation of fresh stimulus targeted at supporting a large spectrum of US households and small businesses gets stronger. On the other hand, Biden is expected to partially undo the large tax cut that President Trump had delivered. For example, the corporate tax rate that was brought down from 35% to 21% might go up to say 28% relatively quickly, partly in a bid to generate resources for the broader stimulus plan.
With several other large economies continuing with stimulus, another chunky dose from the US should boost prospects of global recovery, reflation and risk assets. Historically, Democrat regimes have experienced tax hikes, while Republican regimes have typically seen tax cuts. Nevertheless, interestingly, over the last three decades or so, US equity market returns during Democratic regimes, on an average, had been about 12 percentage points higher than that during Republican regimes.
Crude oil, green energy
While global recovery and reflation may offer an immediate boost for various commodities and commodity exporting economies, future price trend of crude oil - a key factor in determining India's economic well-being - might be more nuanced. The Biden regime is likely to accord greater focus on long-term climate and environmental issues potentially supporting green energy initiatives, and a more restrictive policy bias against fossil fuel.
A stronger diplomatic focus of the Biden-led US may bring about broader international support on such issues, resulting in a stable and somewhat downwardly anchored oil price trend compared to what could have been the case under a second term for President Trump.
Also, a bias for the US staying relatively "low key" as regards their Gulf policy, akin to that during the Obama regime, and broadly contained geopolitical uncertainties in the region are some of the other factors that can have a soothing effect on crude oil prices over the longer term. Fewer verbal and social media interventions from Biden will also help containing day-to-day fluctuations.
Indian industries, trade talks
Amid the implications of a Biden victory for Indian industries, one notes that India's information technology (IT) industry might be a key direct beneficiary of a possible easing of immigration norms, while likely higher US corporate taxes might be a headwind for near-term technology spending in research and developments (R&D) along with potentially stricter regulatory oversight. The usual Democrat bias of larger healthcare spending might be a tailwind for the pharmaceuticals industry at large, including for Indian pharma industry.
As the new regime starts, on the trade negotiations front, India would like to be included in the US' 'Generalized System of Preference'. Also, issues such as market access in case of agricultural commodities, tariffs on India's various metal exports including steel and aluminium, flexibility of pricing of medical devices might emerge as some of the priorities in near future.
A softer US stance as regards sanctions on Iran - a possible scenario in the Biden regime - might also be a material positive for India given India's historically strong trade ties with Iran both on imports (eg., oil) and exports (eg., agro commodities) front.
EM economies, GVC relocation
As President Trump's regime comes to an end, global trade tensions look set to de-escalate and 'de-globalisation' concerns will likely abate meaningfully. One expects emerging market (EM) economies to benefit as an asset class. A number of EM currencies - including in Asia - might witness modest strengthening vis-a-vis the US dollar. This can help equities in several EMs to benefit, given the importance of currency movement in case of EM assets.
Of late, President Trump's high-pitched anti-China rhetoric prompted some efforts towards diversification of the global value chain (GVC) away from China. During the Biden regime, the aggressive stance of the White House against China is set to ease substantially.
While taking into account a longer-term strategic view, GVC relocation away from China may continue to some extent, the urgency for the same will be far less than what could have been in case of a Donald Trump re-election. Nevertheless, India's direct gain out of that process had so far been limited and we did not pencil in expectations of any major uptick in this regard in the near term.
Indian financial markets, INR
Despite heightened COVID-19 related uncertainties during 2020, the Indian rupee (INR) strengthened reflecting surpluses on both current and capital accounts of the balance of payments (BoP), while the RBI's forex buying limited INR gains. One expects the RBI to continue modulating its forex purchases in a way to ensure largely range-bound INR movements in the coming months.
Overall, financial markets in India seem to be broadly on a decent footing as the economy is gradually recovering from the COVID-19 blow. With the US election results coming broadly on expected lines, one potential key uncertainty for financial markets, including for Indian markets, stayed behind us. With generally improved prospects for EMs, likely continued BoP strength, a range-bound INR, and signs of nascent uptick in macroeconomic indicators and corporate performance, Indian markets seem to be entering an interesting phase.
The author is Chief Economist & Head of Research in Bandhan Bank. Views are personal.
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