economy india

India Weighs New Trump Trade Demand, But Modi Has A Much Bigger Problem: Stagflation

"We are doomed".

The Trump administration has been angling to secure a trade agreement with India for the better part of two years.

To be sure, Donald Trump and Narendra Modi have some things in common. For example, they’re both dangerous nationalists hell-bent on transforming their respective countries into monolithic societies that discriminate against religious minorities. Arguably, Modi is far more nefarious than Trump in that regard.

Trump attended a Texas stadium rally for the Prime Minister back in September. The spectacle was dubbed “Howdy Modi”.

But Trump irritated New Delhi last May when, after a brief delay to avoid influencing local elections, the US ended India’s preferential status under the GSP program.

Just weeks later, in mid-June, India hit back with tariffs on US goods including almonds, walnuts and apples.

Read the full story on India’s GSP status

This dispute remains largely unresolved. Trump is set to travel to India next month, and negotiators are now working to cobble together terms for a deal that would ideally see New Delhi roll back tariffs and the US restore the country’s preferential trade status.

And while America’s apple and almond farmers would be thrilled with any such deal (India is easily the biggest buyer of US almonds and the second-largest buyer of US apples), it’s not enough for Trump.

According to sources who spoke to Reuters Friday, “India has offered a partial relief on medical device price caps that have hurt American pharma giants and a roll back in tariffs on some US goods, [but] Trump’s team wants a sweetener of $5-6 billion in additional trade” in exchange for the restoration of India’s GSP status.

Specifically, Trump told India last month that the US wants the country to ramp up imports of frozen poultry products. “The deal has to be agriculture focused, the US is putting a number on everything”, a source told Reuters.

In other words, this is another election ploy for Trump, and it may work. Who knows, maybe “I made frozen chicken great again” will play well with voters, even if the actual economic impact is miniscule.

As for Modi, he needs all the help he can get economically. The Indian economy is staring down stagflation, as an alarming deceleration in growth collides with rising prices. Headline inflation surged to 7.35% in December, the highest in five years. The following chart is something straight out of an economist’s nightmares:

This is a problem – and a particularly vexing one at that. “If Modi wants to make his pledge to turn the country into a $5 trillion economy by 2024, from $2.7 trillion now, India needs its economy to expand at a 9%-10% pace for a sustained period of time”, Bloomberg explained last year, adding that “with growth slowing for the past six straight quarters, and little sign of a sharp rebound, that’s a setback for efforts to fix the extreme income gap”.

“Setback” is putting it mildly. The above doesn’t even begin to capture the severity (let alone all the nuance) of this situation. At the risk of overstating the case, Modi has a burgeoning economic crisis on his hands. And real rates are sharply negative, which constrains monetary policy, no matter how beholden it is.

There’s not enough time in the day to do this story justice, but suffice to say doubts linger about the viability of any recovery narrative for 2020. Despite recent measures aimed at shoring up growth – including September’s corporate tax cuts – optimism is in short supply.

As one New Delhi resident (a Modi critic) described it to me on Friday morning: “We are doomed”.

Reuters also said Friday that India will likely raise tariffs by 5%-10% on a hodgepodge of goods including electronics, chemicals and handicrafts, in a move targeting some $56 billion in imports. Modi, Bloomberg wrote in a great November piece, is “treating trade deals like Trump”, blatantly pandering to key constituencies, irrespective of broader concerns.

This is the backdrop against which Modi and Trump will meet next month.

Oh, and the two leaders have another thing in common – controversy aside, they’re enjoying near record-high stock prices.


3 comments on “India Weighs New Trump Trade Demand, But Modi Has A Much Bigger Problem: Stagflation

  1. UH, aren’t the vast majority of Indians vegetarians? Can we stuff enough frozen poultry into the mouths of the Muslim minority??

    I guess that’s too complicated.

    (Similar to the surprise in the Bush II Whitehouse when they learned that their are two branches of Islam.)

    • I don’t know the percentage of vegetarians in India.

      The percentage of Hindus, however, is an overwhelming majority. As such, while beef consumption is therefore rather subdued, chicken is one of the more common forms of animal protein consumed in India.

      • Tom – a quick web search suggests that your take is correct.

        Now, do they want chickens dipped in chlorine baths that even the Brits don’t want? Perhaps, if forced.

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