What do 50% tariffs mean for Indian equity investors?

As Trump’s tariffs kick in on India today, Andy Draycott, portfolio manager of the Chikara Indian Subcontinent Fund, comments on India’s next move and the impact on investors:

 
The Trump administrations’ implementation of the most draconian tariffs in Asia has rattled India’s elite as they grapple with an unprecedented about turn from US policy makers who until earlier this year had spent two decades cultivating the ‘Howdy Modi’ US/Indian love in. The change in narrative appeared to happen during protracted negotiations for a free trade agreement, whereby India held firm on their red line to not open the politically sensitive agricultural sector to American imports. This appears to have kicked off a chain reaction that has culminated in Navarro & Bessent calculating that India has been profiteering on cheap Russian crude, with assertions that India’s moguls have made in excess of $16bn at the expense of Ukraine’s people.

Whether or not this extrapolation is true is a moot point, and likely a political gambling pawn in order to get India to drag a reticent Putin to the negotiating table. A calculated gamble by the Americans, who at first actively encouraged India to absorb the vacuum of EU buying of Russian crude in an attempt to keep world prices/inflation in check. India (as America well know) cannot decouple from Russia, for the simple reason over 50% of installed military hardware is procured from there, ignoring the fact that Soviet/Indian relationships have been far more stable than US/Indian relations over the past fifty years.

India can negate the impact of the tariffs through fiscal stimulus, however the lost opportunity of goods manufacturing, if the rates pervade will have bigger implications than the net $40bn in jewellery, leather and shrimps. Both India and the Trump administration are waiting to see who blinks first, but if neither do, then America will push India towards BRICS integration, and longer term significantly impact the relevance of the US dollar; If Brazil, Russia, India and China – representing forty percent of population and GDP decide America is no longer a reliable partner, how long before they trade in Yuan or Rupees?

It is our belief that Trump wants a deal. He wants Putin to cease the war, and for India to open its borders; in the eventuality he gets what he wants, we suspect the tariffs will be dropped, but if neither is achieved, then ramifications for both the dollar and BRICs will likely be long lasting.

Indian equity investors should be cautious about overestimating the risks posed by US tariffs alone. The macro impact looks set to be relatively contained with Moody’s having predicted a drag of just 0.3% on the Indian economy if 50% tariffs were introduced. Even then, real GDP growth is still expected to come in at 6%.