India saw lower spike in the uncertainty index amid Trump's tariffs

Other emerging markets have seen greater volatility

The Index of Economic Policy Uncertainty (EPU), which tends to rise during major events or disruptions -- like the one we saw during pandemic -- signalled relative calm in India unlike elsewhere amid America’s global tariff hikes.

 

India’s uncertainty index has seen a relatively lower spike than many other emerging market peers. It was lower than both the pandemic and global financial crisis peaks in uncertainty.

 

The Global Economic Policy Uncertainty index is at its highest level ever and many of India’s peers are at elevated levels (see chart).

 

These indices use key words in economic coverage by the media to judge the perception of uncertainty. The data is based on research by Scott R Baker from Northwestern University, and Stanford University’s Nick Bloom and Steven J Davis.

 

“The EPU index correlates very strongly to macroeconomic stability… a secular trend of reducing economic policy uncertainty may have helped to foster the turnaround in investment activity,” noted India’s 2018-19 Economic Survey.

 

A spike in values often correlates with deterioration in other fundamentals. The relatively lower values as of March may signal that the tariff uncertainty may have been less priced-in for India than elsewhere, and point to a rise in index values to reflect higher uncertainty.  

 

Experts who spoke at the time of the first round of tariffs noted the unexpected nature of the barriers imposed.

 

“The absolute magnitude of the tariffs across the board (was) still somewhat unexpected,” noted Rishi Shah, partner at Grant Thornton Bharat speaking in April, though clarifying that other nations in the region appeared to face more significant challenges than India’s 27 per cent in the first round of tariffs announced in April.

 

The US has implemented a 34 per cent tariff on China. Rates were also comparatively higher for several countries including Bangladesh (37 per cent), Indonesia (32 per cent), and Vietnam (46 per cent). This has since seen many revisions leading to a spike in uncertainty.

 

“The tariff rate on India was higher than expected. However, compared to other major trading partners ...particularly that compete with India in certain product lines, India (had relatively) lower tariffs,” said Sujan Hajra, chief economist and executive director, Anand Rathi Group, speaking in April. 

 

“We believe that the economic uncertainty will be relatively higher in the near-term given the trade and protectionist policies adopted. The near-term impact on inflation will be closely watched by the central banks...Also, the risk of slowdown may pose another level of risk,” added Hajra.

 

“EPU index is very strongly correlated to volatility in exchange rate, stock market (and) inflation and various other macroeconomic variables,” noted the 2018-19 Economic Survey.

 

Some countries have seen elevated numbers during local crises.

 

For example, Brazil exhibited rising uncertainty during the impeachment of President Dilma Rousseff in 2016; and widespread protests in 2017. Russia had seen a spike during the early days of its Ukraine invasion in 2022. China’s all-time high was during the Covid-19 pandemic in 2020. India’s all-time high was during 2012 when the country was widely seen to be going through “policy paralysis”.

 

The dependence on media perception can mean that fewer mentions of uncertainty because of state control in countries like China or elsewhere can also translate into lower index values.

 

Private sector capital allocations may be affected and competitive currency devaluation remains a possibility, Shah had suggested.

 

“The only certainty is that there will be considerable policy uncertainty in the coming months,” he said.