What Trump's Election Victory Means For Indian IT, Pharma And Other Sectors

The year 2024 has been a historic one in terms of elections, with 50 countries going to the polls. These included major economies, such as India, Russia, various European countries and the US, whose political outcomes have the potential to impact the global economy and influence policy decisions significantly.

One of the most charged elections in recent history was that of the US, where Republican candidate Donald Trump got re-elected by a resounding majority as the 47th President of the US after a gap of one term. Trump will be sworn in on January 20, 2025.

Different markets reacted differently to his victory in the November Presidential elections. In India, the equity market gave a loud cheer to Trump’s victory. Both the major indices, the Sensex and the Nifty, rose by 1.13 per cent and 1.12 per cent, respectively, on November 6, 2024. But some markets, such as China fell on the fear of trade tariffs.

Those were the initial reactions but Trump’s return to US presidency is poised to have a significant impact on the global markets, including India. His proposed policies on trade, taxation, energy, and immigration will influence global trade flows, foreign investments, and economic dynamics that extend to India's economy and equity markets.

Let’s understand the key proposed changes and their likely impact.

Big Picture Changes

Trump has proposed “America First” policies, such as lowering corporate taxes, imposing higher tariffs on China and the rest of the world, and incentivising local manufacturing, which is expected to be positive for its economic growth. “If the policies, such as corporate and individual tax cuts, import restriction and action against illegal immigrants, that Donald Trump has communicated are implemented, it will definitely be pro-growth and employment for the US. For India, IT and other export-oriented sectors like textiles and auto ancillary will tend to benefit,” says Ajay Vora, head-equities, Nuvama Asset Management.

Lowering Tax: During his election campaign, Trump promised to reduce the corporate tax rate to 15 per cent from 21 per cent for companies manufacturing in the US. Additionally, he promised to cap interest rates on credit cards at 10 per cent to reduce the burden of credit card debt, make interest payment on car loans fully tax deductible, stop tax on social security benefits, provide tax credits for family caregivers to help ageing seniors and family members, along with some other tax sops.

According to a CareEdge rating report, US Elections and Impact on Indian Capital Markets released after the US election results, these fiscal measures could improve consumption spending in the US economy. This could be inflationary and will also lead to a wider fiscal deficit. The US already had a high fiscal deficit of 6.3 per cent of the gross domestic product (GDP) in fiscal year 2024 and a high debt at 123 per cent of the GDP.

Trade Tariffs: Trump has proposed to impose 60 per cent tariffs on imports from China and 10-20 per cent tariffs on imports from the rest of the world.

He has also proposed 100-200 per cent tariffs on cars manufactured in Mexico to encourage and increase job creation in the US automobile industry. He also mentioned 25 per cent tax on all other imports from Mexico unless the latter clamps down on illegal border crossing. Through these tariffs, Trump aims to prevent Chinese companies from setting up plants in Mexico to avoid US tariffs.

“Higher tariffs could result in disruption of global trade flows and lead to overall weaker trade growth. They will also lead to inflationary pressure in the US economy, with upward pressure on prices of imported goods. India could benefit from any re-orientation of the global supply chain away from China. However, a slowdown in overall global trade would have negative repercussions for India too,” CareEdge Rating said in its report.

Experts believe that higher tariffs on China will benefit India, as US companies are likely to explore and rely on other countries for their supply chains. India is well-positioned to gain from this situation, given its strong emphasis on the “Make in India” initiative.

Says Trideep Bhattacharya, president and chief investment officer (CIO)-equities, Edelweiss MF: “Our outlook for Indian markets under a potential Trump administration remains optimistic. While global trade volatility may rise, India is likely to be a relative beneficiary among the emerging markets as US companies pursue a ‘China +1’ strategy, likely boosting sectors like electronics, manufacturing services, chemicals, and pharmaceuticals.”

But there may be a flip side too. “Sanctions and tariffs on imports from the rest of the world may hurt global growth and eventually lead to higher inflation on the back of shortage of goods and services. Also to combat the same, China may announce a large stimulus, further fuelling inflation and restricting the Federal Reserve from cutting rates. So broadly, we believe policies are self-offsetting to some extent and it needs to be seen what gets implemented,” says Vora.

End Of War: In his first speech after winning the elections, Trump vowed to end the war between Russia and Ukraine, and the conflict in the Middle East. However, he has not outlined how he plans to do this. If he can manage to end the war, de-escalation in geopolitical tensions will bode well for the Indian economy.

Immigration Restrictions: Trump has been extremely vocal about his intention to carry out mass deportations, and deploying the military for the purpose, if the need arises.

Stricter policies on outsourcing and restrictions on H1-B visas could weigh on India’s IT sector, which relies heavily on the US market. Indians receive the highest number of work visas from the US, mainly for the IT sector.

According to a Nomura report, Indian nationals received the highest number of work visas (H-1B visas) from the US, accounting for over 72 per cent of the visas issued in FY23. The latest naturalisation statistics (FY23) from the US has India ranking second after Mexico. Also, Indian Americans are emerging as an important political bloc in the US.

But the fact that Trump has prioritised action against only illegal immigration, particularly across its borders, may not spell too much trouble for Indian IT employees working in the US. But the legal immigration regime for professional workers and students could be tightened.

Indian IT companies are also prepared to tackle this issue through local hiring in the US. “Indian IT companies have tried to de-risk this challenge by hiring more locals in onsite markets, relying on subcontractors, and opening more near-shore delivery centres,” writes Philip Capital in a report. This should limit the fallout from tighter immigration norms under Trump 2.0.

Energy: Trump favours fossil fuel. In his election manifesto, he indicated his intent to reduce energy prices by increasing domestic fossil fuel production. Lower crude oil prices bode well for Indian refiners and consumers. Higher gas output would open up avenues for incremental long-term gas contracts for Indian gas utilities.

Trump also plans to remove subsidies for green technologies under the Inflation Reduction Act which was implemented in 2022, and do away with the restrictions on greenhouse gas emissions. Additionally, Trump has pledged to remove limits on natural gas exports.

“Increased US oil production and easing of global crude oil prices would be a positive for the Indian economy, as India’s oil import dependency is high at around 85 per cent,” writes chief economist Rajani Sinha in the CareEdge report.

Impact On India

The Indian equity market does not rely on global factors alone, including the upcoming US policy under Trump. Therefore, domestic factors will also play a crucial role in deciding the market direction.

“Although it is early to predict the exact impact of the new US government policies on the Indian markets, India has been a strategic partner for the US and this is unlikely to change. In the short term, the focus will be on how these policies (Trump’s) and measures play out and their impact on the global economy,” says Ashish Gupta, CIO, Axis Mutual Fund.

The earnings outlook and valuations remain crucial for India, and the long-term performance of Indian equities is influenced more by the domestic economy than by global factors, adds Gupta.

Of late, the Indian equity market has been on a rollercoaster ride due to massive selling pressure by foreign institutional investors (FIIs). FIIs still own a little over 36 per cent of the free-float market cap despite higher participation from domestic institutional investors (DIIs) and retail investors (see Why FIIs Matter). October 2024 marked a record month for the Indian market, but for negative reasons. FIIs recorded net sales of Rs 1,14,445.89 crore during the month, the highest ever for any single month since March 2020. Previously, in 2024, the highest net sales by FIIs were in May, when they sold Rs 42,214 crore worth of Indian equities.

However, the participation of DIIs and retail investors restricted the market from falling by a major extent. The broader indices, the Sensex and Nifty 50, are down by around 10.2 per cent each from their all-time highs as on November 21, 2024. The net buying by DIIs in October was Rs 107,254.68 crore. The trend continues in November.

In what helped to strike a balance, until November 21, 2024, while FIIs sold equity worth Rs 39,668.98 crore, DIIs bought equity worth Rs 35,836.93 crore.

Still, the difference between the FII selling and DII buying has not only dented the equity market, but also put pressure on the Indian rupee (see Falling Rupee). But experts don’t see this correction as a major cause of concern. “Overall, India’s structural drivers remain on a strong footing over the longer term. Any negative developments in China could potentially redirect foreign investments to India and bode well for our manufacturers. Stronger dollar and higher US bond yields would likely keep overall flows to emerging markets (including India) muted in the near term. Given the large pipeline of equity supply over the next few months, this will be a headwind for the equity markets,” says Gupta.

The Indian equity market was trading at a higher valuation and post this correction, valuations have cooled down to an extent. This might give comfort to FIIs to come back and lift the market mood.

Says Arindam Mandal, head of global equities at Marcellus Investment Managers: “The Republican sweep will unlikely alter long-term investment themes, but it would likely boost sentiment in cyclical sectors like industrials and financials, which might come at the cost of megacap stocks that might face near-term pressure.”

He adds: “For global investors, this may mean continued dollar strength despite some views that Trump prefers a weaker dollar—an idea contradicted by the dollar’s appreciation during his first term, especially post-2018 tariffs. Trade tensions with China could also persist, potentially benefiting select Indian exporters over the long term.”

Domestic consumption will also play a crucial role in investment choice for global investors. Unlike China, which relies heavily on exports, India being a domestic consumption driven market will catch the fancy of global investors. “Going forward, we believe investor attention may pivot towards economies driven by robust domestic demand growth. In this light, Trump’s pro-business policies might drive interest in US as well as economies like India that are driven by strong domestic demand growth,” says Bhattacharya of Edelweiss MF.

Opportunities For Indian Investors

Export-oriented sectors could be major beneficiaries of a strong dollar and higher spending in the US because of the tax cut.

India is one of the world’s top services exporters, particularly of IT and professional services, and the US is an important customer of India’s services sector. In this scenario, IT would be the major beneficiary despite immigration restriction.

“Indian IT companies have a lower visa dependency given that most IT firms have 55-60 per cent of their workforce, who are US citizens or green card holders. That bodes well for these companies. Further, unlike last time, Trump has mentioned this time that he is against illegal immigration and supports legal immigration,” writes Axis Mutual Fund in its report.

Pharma is another sector that will get a boost under the new regime. Lower drug prices by the new US government will be favourable for Indian pharma companies that produce low-cost drugs. Weaker rupee will further support them.

Indian manufacturers that come under ‘Make in India’, particularly in semiconductors, mobile phones, and printed circuit boards, will benefit. Also, lower energy prices bode well for the oil marketing companies.

kundan@outlookindia.com