Strategy Note /

India: Trump-Modi grandstand more likely than grand trade deal

    Hasnain Malik
    Hasnain Malik

    Strategy & Head of Equity Research

    Tellimer Research
    21 February 2020
    Published byTellimer Research

    US President Trump is due to visit India PM Modi on 24-25 February. We do not expect any major developments that matter for investors short-term; a partial trade deal is possible but unlikely. The US accounts for 15% and 6% of Indian exports and imports, respectively, and India enjoys a trade surplus with the US but a trade deficit globally. 

    The US and India both regard China as a strategic threat, but the thorny issues that have created division between the two countries (eg trade, Afghanistan, Iran) are unlikely to be resolved during the trip. The topics not mentioned by both leaders will probably provide more important clues as to some of the longer-term risks facing India than those topics that are.

    We reiterate our previously published view that the investment case in India neither deserved the universal acclaim among foreign investors and commentators that it once enjoyed, nor the increasing disillusionment we now hear India: From incredible to in trouble? No, just in between, 30 December 2019. 

    MSCI India is up 1.5% ytd and up 13% over the past year, compared with MSCI EM down 1% ytd and up 5% over the last year. Trailing PB and PE multiples for MSCI India are within 5-10% of the five-year median, similar to MSCI EM.

    Gloss of the spectacle, substance of the agenda

    Spectacle is more likely than substance, given the public displays of bonhomie between the two historically, the populist and nationalist rhetoric favoured by both and the difficulty of establishing common ground on the areas of substantive disagreement between both governments. 

    Trump’s trip to India is important nonetheless in the context of India’s economic slowdown and domestic political challenges (protests, Delhi election loss), the imminent US-Taliban agreement in Afghanistan and, of course, the overlapping long-term US-India interest in countering China. 

    A meaningful agenda for discussion would include the following but the likelihood is that merely a subset, over which there is the least disagreement and the shortest path to publicising “deals done“ and “foreign policy wins”, will be covered.

    1. US Trade - the suspension of tariff relief for Indian exports to the US under GSP (Generalised System of Preferences), higher tariffs on US imports of Indian steel and aluminium products (these were applied globally by the US), Indian tariffs on imports from the US (eg agricultural and medical device products), and market access for US firms entering India (intellectual property rights protection, equal treatment of international card payment companies and local incumbents) are all issues under negotiation for almost a year.
    2. Iran Oil - Indian imports of oil from Iran no longer enjoy waivers from US sanctions (although it was granted an exemption for its construction work at the Chabahar port in Iran).
    3. Russia Arms - the US aims to be a key supplier in the upgrade of the Indian military, particularly its navy; India accounted for 35% of Russian arms exports over 2013-17.
    4. China technology - the US aims to curtail the procurement of Chinese-developed mobile network equipment for 5G (Huawei and ZTE supply 2G, 3G, and 4G network equipment to Bharti Airtel and Vodafone Idea). 
    5. Afghanistan - orderly US troop withdrawal requires a deal with the Afghan Taliban and cooperation from the Pakistan military, and the US has seemingly pursued this deal without involving the Indian-aligned Afghan government.
    6. Kashmir and Human rights - the support for deeper, strategic relations with India has enjoyed bipartisan support from the US Congress but the concern over human rights, particularly after the 2019 repeal of the special status of (the Indian state formerly known as) Jammu and Kashmir under Article 370 and the passage of the Citizen Amendment Act, has led some in the US Congress to question this.
    7. US Immigration - restrictions introduced by the Trump administration have made it tougher for skilled Indian labour to migrate to the US (legal immigration from India to the US dropped c8% between 2016 and 2018).

    Trade dispute background

    • India’s trade surplus was US$24bn in 2018 (US$83bn exports and US$59bn imports).
    • In June 2019, US President Trump revoked the relief on trade tariffs afforded to India under the GSP after petitions from the US dairy and medical device industries. India responded with tariffs on 28 US product categories. Both have lodged disputes at the WTO.
    • An escalation in the trade dispute risks higher tariffs on imports to the US from Indian and an investigation of India under the US Trade Act of 1974.
    • GSP status enables developing countries like India to enjoy low tariffs for exports to the US (ie it enables exceptional treatment, under WTO convention, to preferential trading partners). Around 12% of Indian exports to the US benefited from GSP status in 2018.

    Trump’s transactional foreign policy with allies and partners

    The trip may also serve as a reminder that, under Trump, those countries that consider themselves the closest allies and partners of the US, eg in NATO, the GCC, LatAm and the former CIS, are having to adapt to a more tactical and transactional relationship compared with previous US presidents.