Dark clouds gather over Indian market amid Trump's return, growth slowdown

The Indian stock markets have experienced a remarkable surge over the past four years, recovering from the depths of despair during the pandemic. The Nifty 50 closed at 8,598 at the end of March 2020, and no one could have predicted the extent of rebound: A pandemic, the Russian invasion of Ukraine, Western sanctions, a slowdown in China and Europe, and even the loss of a parliamentary majority by India’s ruling party, led by an extremely popular leader. By the end of September this year, the index had soared to 25,810, a threefold and more increase in just over four years. The Nifty Small Cap Index performed even better with a fivefold rise. All good things come to an end or, in the case of the markets, come to a halt for a while. Over the past six weeks, the Nifty 50 dropped 9 per cent, while the Small Cap Index fell 8 per cent. Though experts play down these declines, I’m not so sure. This could mark the beginning of a sluggish phase or even a prolonged downturn. A variety of local and global factors will determine the direction, and many of them are beyond the Indian government’s control. One key issue that needs to be watched is Donald Trump’s sweeping victory in the United States (US) presidential election. 

Trumponomics 

On November 6, it became clear that Mr Trump would return to the White House. Strangely, the Indian markets rallied on that day despite the fact that Mr Trump’s stated plans offer little benefit to India. However, once the reality of his return set in, the markets began a six-day selloff. Foreign investors, who tend to have a better grasp of macroeconomic trends than Indian investors, have been selling Indian stocks for some time. Mr Trump’s victory has only added fuel to the fire. 

While world leaders, investors, and diplomats wait to see what the unpredictable President-elect will do, he has already made key appointments that align with his hard-edged “Make America Great Again” (MAGA) agenda. Among his appointees is Elon Musk, who has been appointed to head the new Department of Government Efficiency. The writing on the wall is clear. Mr Trump is in a tearing hurry to implement his campaign promises. It would be suicidal to assume that his promised actions would be tempered by realpolitik or get bogged down in the Washington “swamp” or the “deep state”.  Even if a part of Trumpo­nomics is implemented, it will hit the rest of the world like a tidal wave, from which no major economies will be spared. 

Among Mr Trump’s planned actions are imposing tariffs of up to 60 per cent on products from China and 10-20 per cent on those from the rest of the world. Any country that has a large trade surplus with America is “cheating us”, he feels. So, Mr Trump and his advisers are keen to fix bilateral balances. China runs the biggest trade surplus with the US, followed by Mexico and Vietnam. They will be hit the most, but India too is well up there on the hit list. It is 11th on the list of countries that have a trade surplus with the US, just below South Korea, Taiwan, and Italy. Large tariffs on China and Mexico (which China also uses to direct exports to the US) seem certain. In response, China will cut its prices further and weaken its currency to protect its US exports. It will also redouble its efforts to capture more of Global South, where it has been remarkably successful in pushing out Western countries over the past few years. India has no strength to do any of this. We have a high-cost and inefficient manufacturing base with a weak rupee, something our muscular government has not been able to fix. 

The next big problem for the world is a stronger dollar. Mr Trump is pushing hard to make American firms manufacture more in America, through deregulation, cutting environmental regulation, and lowering energy costs. If he succeeds, the US will attract investment, which will make the dollar stronger. From September 27, the dollar is up almost 6.5 per cent and 3 per cent since November 5. The inflationary impact of Mr Trump’s policies such as tariffs and deporting immigrants will make tight labour markets even tighter and the dollar stronger. Higher inflation will lead to higher interest rates, strengthening the dollar further. It could well be that the Trump team has a solution to this but we will have to wait and see how these basic economic forces can be tamed. A strong dollar makes imports more expensive and increases inflationary pressures for a country like India. 

The timing could not have been worse. Troubles on the external front have come exactly at a time when large well-run domestic businesses are reporting a severe slowdown. Hindustan Unilever, Nestle, Asian Paints, Britannia, Tata Consumer, cement companies, passenger car companies, banking giants, diversified giants like ITC and Reliance, microfinance companies … are all struggling to grow. Jefferies, a foreign brokerage, recently lowered FY25 earnings estimates for nearly two-thirds of Indian companies that it tracks and which have announced their September-quarter results; this is its steepest downgrade ratio since 2020. The reason? A cyclical slowdown in the economy. And yet, many Indian companies continue to be valued as if they are going to report double-digit growth year after year. Trumponomics, poor growth, and high valuation certainly don’t make a bullish recipe for Indian markets. 

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The writer is editor of www.moneylife.in and a  trustee of the Moneylife Foundation; @Moneylifers