The White House doesn’t like what it sees. Just before Modi’s trip, Peter Navarro,Donald Trump’s trade envoy, lambasted Modi for “getting into bed with the authoritarians”.
Modi’s public display of defiance against Trump comes hot on the heels of the US president pummelling India with his highest tariff: a 50pc hit on about two thirds of the country’s $87bn (£64bn) exports to the US.
Unlike almost any other world leader, Modi has shown no sign of yielding to Trump’s tariff threats, refusing to proffer multibillion-dollar investment pledges or praise the president as a peace-maker. Some media reports say he is refusing even to take Trump’s calls.
Politically at least, Modi’s stance seems to be working. Indians see the 25pc secondary tariff – levied on top of the 25pc country-specific tariff, supposedly to punish India for buying Russian oil – as capricious and unfair. Recent polls suggest Modi remains voters’ preferred prime minister, and his BJP party’s fortunes are on the rise.
But Modi’s defiance may come at a significant cost to the world’s fourth-largest economy, or else to the country’s budget as his government is forced to bail out industries most exposed to the US tariffs.
“We have basically come to terms with the fact that a 50pc tariff on India is not a problem that we can find a solution to. It’s a circumstance that we have to live with,” says Aastha Gudwani, the India chief economist at Barclays.
“Now we need to figure out how do we live with it, and how do we deal with it?”
The situation is potentially acute. A report from the Delhi-based Global Trade Research Initiative suggests that Surat and Jaipur jewellers, east-coast shrimp farmers and textile factories and rice growers all over the country could see their American buyers quickly desert them.
Anecdotal evidence is already circulating about potential job losses and factory shutdowns. Traders have driven the rupee to a record low.
“At this moment, our priority is to somehow retain the market in the US. Because if the customer is lost, getting back the customer will be a challenge,” says Ajay Sahai, the head of the Federation of Indian Export Organisations.
The government’s economic ministers and advisers were hunkered down all last week, looking for ways to shield India from the blow. That could mean using taxpayer funds to prop up affected businesses. This would help them to keep prices competitive as they wait and hope that the tariff will come off.
Subsidies could also avoid exporters having to shed workers. “Our priority has to be to retain the labour, use the lean period for reskilling, upskilling of workers, so that they become more useful to the company when this tariff war settles down,” Sahai says.
He believes Delhi is likely to roll out a scheme where it pays some of a company’s wages bill in proportion to how much of its output normally goes to the US.
That sounds like a hefty slug for a government that has been struggling to get the public finances back in order after a similar period of interventionist largesse during the Covid pandemic.
Delhi’s debt-to-GDP ratio jumped to almost 90pc during the pandemic and its aftermath, and is still hovering at 80pc, about 10 points higher than before Covid. Modi ran a budget deficit of 4.8pc of GDP last year, also elevated from pre-2020 levels.
Subsidies aren’t the only new cost the government is contemplating. Modi has flagged an overhaul of India’s fiendishly complex consumption tax, to get prices down and spending up. The plan is reportedly to get this agreed before the Diwali festival in October, when Indians traditionally hit the shops.
The hope is that fortress India, an economy where domestic demand powered year-on-year economic growth of 7.8pc in the second quarter, can look after itself.
Exports only account for one fifth of GDP, compared with almost one third in Britain and France, for example. Within the export sector, services comprise almost half of the total and these haven’t yet been hit by Trump’s tariff crusade.
“Services exports remain resilient, and that could provide some kind of buffer against this entire global trade disruption,” says Tanvee Gupta Jain, the chief India economist at UBS.
Still, experts say India will need to swallow its longstanding protectionist instincts and start pursuing free-trade deals to offset the impact of tariffs.
Delhi has already landed deals with Britain and the UAE, two of its largest markets behind the US. It is now being urged to speed up talks with the likes of the EU, and even join Asia’s CPTPP trade bloc.
Modi, meanwhile, seems keen to court the leaders he rubbed shoulders with in Tianjin at the weekend, during his first trip to China for seven years. Trump’s belligerence is drawing India and China into what Xi has called “a dragon-elephant tango”.
Narendra Modi and Vladimir Putin shakes hands at China’s summit as the former rivals eye a potential alliance – Sputnik/Alexander Kazakov/Pool via Reuters
The two nations have traditionally viewed each other warily but now seem newly willing to resolve a decades-long border dispute, resume direct flights, ease visa restrictions and look to improve trade in rare earths and other critical commodities.
However, whatever China’s allure as a political hedge against Trump, it looks very unlikely to replace the US as a buyer of Indian goods. India posted a record trade deficit of $99bn with China last year.
Meanwhile, relations with Russia are also blossoming. Subrahmanyam Jaishankar, India’s foreign minister, was in Moscow last week, pledging to smooth the way for a 50pc increase in two-way trade to as much as $100bn.
Putin – whom Modi spoke to twice in the past month, and calls a “friend” – may visit India before the year’s end.
India is the biggest buyer of Russian crude oil, importing 1.5m barrels per day (bpd) in the first three weeks of August, about one third of its total. Trump’s secondary sanctions have not changed that pattern yet.
The country cannot necessarily afford to wean itself off Russian crude, warns UBS’s Gupta Jain.
If India stops importing Russian oil and heads to the Middle East for its needs, the price the rest of the world pays for oil could surge given the changing balance of supply and demand. That would have significant implications for India.
“A drop or increase in global crude oil prices of, say, $10 a barrel, could narrow or widen the current account deficit by almost $15bn, which is close to 0.35pc of GDP,” says Gupta Jain.
“Whatever India decides on oil purchases – whether we are buying it from Russia or diversifying into other markets – is completely a function of India trying to balance and ensure that oil prices remain contained, because it matters to India’s macro stability.”
There are still hopes that Modi and his trade negotiators can broker a deal with Washington regardless.
“The US earns far more dollars from India than India earns from the US, and the relationship is very deep,” says Ajay Srivastava, the founder of Global Trade Research Initiative. “I think this is an emotional outburst from the US side more than any logical thing, and it should be sorted out soon.”
Closed-door trade talks are continuing. But the White House’s public rhetoric is still fiery. Trump’s trade envoy Navarro called the Russia-Ukraine conflict “Modi’s war”, telling Bloomberg that India was “feeding the war machine”.
Pictures of Modi with the authoritarians in Tianjin are unlikely to help repair the Indian leader’s formerly productive relationship with Trump.
The next opportunity to mend fences could come when Modi goes to the UN’s annual leaders’ summit in New York in September, or if Trump heads to India in October for a so-called quad meeting with Modi and the leaders of Australia and Japan.
But Indian media reports suggest rancour abounds. Modi has reportedly bristled at Trump’s desire to claim credit for de-escalating a recent flare-up between India and Pakistan. His ingratitude may have in turn annoyed Trump, and triggered the tariff salvo.
“The secondary tariff may go at any point in time, because it is without any rhyme or reason,” says exporters federation boss Sahai. “If Mr Trump wakes up in a good mood, probably that may happen.”
Until then, Delhi is prepared to dig in and to pile the sandbags around its exporters.
