Trade possibilities: Latest numbers should not distract policymakers

Strong November export growth offers relief, but trade uncertainty persists as India races to seal a deal with the US amid tariffs, capital outflows and rupee pressure

One of the biggest global economic issues this year has been the radical shift in America’s trade policy. United States (US) President Donald Trump imposed the so-called reciprocal tariffs on all major trading partners and has negotiated new terms of trade with many of them. India has stood out as an outlier in this scheme of things. Aside from the reciprocal tariffs, the US has imposed a penalty in terms of an additional 25 per cent tariff on India for importing Russian oil. India has not been able to resolve the issue. Since the US is India’s largest trading partner, with India enjoying a trade surplus of over $45 billion last year, the issue has been a cause for concern. Given the backdrop, the November trade data, released this week, came as a pleasant surprise for most Indian observers. Merchandise exports increased 19.4 per cent year-on-year (Y-o-Y), the quickest pace in 41 months. Exports to the US also jumped more than 22 per cent. The trade deficit, as a result, narrowed during the month. 

Despite the adverse environment, merchandise exports have grown during April-November, though at a modest pace of about 2.6 per cent. However, the merchandise trade deficit has widened during this period, which is also, in part, why the rupee has come under pressure. Therefore, from the broader policy perspective, better than expected trade numbers for November should not distract policymakers from the objective of sealing a trade deal with the US. The government is hopeful of finalising a framework trade agreement soon, which is expected to address the massive tariff differential with competitors. This is extremely critical. It is worth noting that the tariff differential with competitors, which is about 30 percentage points, could push US buyers of Indian products, particularly low-value and high-volume goods, towards suppliers from other countries. Bringing them back might become difficult for Indian exporters if the deal is significantly delayed. Thus, the risk is that part of the demand for Indian goods may be permanently lost. Higher tariffs curtailing export demand are also a constraint for investment, including foreign direct investment. 

From a macroeconomic standpoint, the balance of payments turned negative in the second quarter this financial year as India also witnessed capital outflows, particularly from equity markets. Thus far this year, for instance, foreign portfolio investors sold Indian shares worth over $18 billion. One of the reasons for selling could be that Indian companies are not really part of the global artificial intelligence-related investment boom. Another reason could be trade-related uncertainties. A trade deal with the US in the coming weeks could possibly reduce or reverse capital flows. India is negotiating agreements with several trading partners other than the US, such as the European Union. Positive movement on these will also improve confidence. 

Uncertainty on both trade and capital accounts is putting pressure on the rupee, which has fallen about 6 per cent against the dollar so far this year. In this regard, it is worth noting that the Reserve Bank of India has done well to let the rupee depreciate, even in real terms. While it may not fully offset the US tariff disadvantage, it will provide some cushion to tradable sectors, and the November trade data may be reflecting this. Nevertheless, the markets will remain focused on the possibility of a trade deal with the US in the near term, making it one of the key things to watch in the weeks ahead.