It’s An Embargo, Not A Tariff, Says Nilesh Shah
On the surface, the US tariff may seem like a simple duty, but this is far from normal, says Nilesh Shah, MD, Kotak Asset Management. He discusses how the tariff imposition could impact India and what steps the government is taking to mitigate the risks
Given the expectation that India would receive special status under Trump 2.0, how do you interpret the imposition of high tariffs?
The tariff is completely opposite to the market’s expectations. Ever since Donald Trump was elected as the US President, there was expectation that he would grant a special status to India. External Affairs Minister S. Jaishankar was given a very prominent place at his inauguration ceremony. When Prime Minister Narendra Modi went to Washington, he was also given a grand reception.
On the surface, the tariff looks like a simple duty. But it’s not. But if you now impose 25 per cent tariff and punitive tariff of another 25 per cent, that is an embargo; and whether you raise it from 50 per cent to 100 per cent, it won’t make any difference, because exports won’t happen at either.
Which sectors do you think will be hit the hardest, and what’s the way forward?
Sectors like gems and jewellery, aquaculture, textiles, and handicrafts are more dependent on the US market. If you impose an embargo, then exports to the US won’t be possible and developing export markets in other countries will take time. So, there will be shock.
If this tariff continues for long, these sectors will be impacted, and the secondary effects will hit the banking sector and consumption. That is why, even before the full impact comes, the government is creating a buffer—by offering relief on goods and services tax (GST), improving ease of doing business, and stimulating the domestic economy.
If the negotiations don’t work out in India’s favour and the tariff stays for long, how will that affect the economy?
The market is still hoping this is temporary. Now the focus is shifting back to processes—GST rate rationalisation and process improvement packages, which were introduced to boost consumption and to stimulate the domestic economy.
If these tariffs continue for long, then for the impacted sectors, a credit guarantee scheme may also be introduced. The sectors will be supported in finding markets outside the US. These measures will be taken to reduce the adverse impact of tariffs on the domestic economy. There will be greater focus on ease of doing business. I would say this is a blessing in disguise. In fact, this gives us an opportunity to focus on our economy.
Can we expect more surprises from Trump that could impact other sectors?
President Trump is using tariffs as a negotiation tool. And remember —understanding him is not just difficult, it is nearly impossible.
When he imposes tariffs, he frames them for geopolitical objectives. In such episodes, India often gets appreciated because of how it conducts itself. If we react aggressively or impulsively, it won’t help. America’s attitude is often: “Either I win, or I make you lose.”
India’s markets have delivered strong returns over the last five years. Now they are consolidating. This correction was inevitable after such a big rally
Do you think measures taken by the government so far are adequate enough to mitigate tariff-related shocks?
Many steps have already been taken. First, there was an income tax rebate of Rs 1 lakh crore, which allowed taxpayers to save that much annually. Then interest rates were reduced, which lowered the equated monthly instalment (EMI) burden by nearly Rs 1.20 lakh crore.
Now when borrowers have a lighter EMI burden, they may spend or save. After that, GST rate rationalisation happened. This year it amounts to Rs 50,000 crore; next year it will be Rs 1 lakh crore. So, that’s for the full year. After that, the 8th Pay Commission will come. Then, measures like banning online gaming will help. People used to lose Rs 10,000 a month. So that money will also be saved.
For the coming year, money is being kept in the hands of consumers, taxpayers and borrowers. The hope is that this money will now be spent. If people take this money and spend it on holidays in Vietnam, then the money will be spent abroad. But if they save it and go to Goa, Ayodhya, or Jaipur, then India’s economy will benefit. If the country’s economy benefits, you don’t need to worry.
There is speculation that BRICS nations may introduce their own currency. How do you see this?
I feel it will be very difficult. With currency, there are many risks.
Off late, the Indian equity market has underperformed compared to major global counterparts, especially those who have done negotiations with the US. Could this underperformance be attributed to concerns over tariffs, or are there other underlying factors at play?
It’s like cricket: A batsman scores a triple century and is exhausted after batting for 10-12 hours. Then a new batsman comes and hits a few sixes. For the one who batted for hours, fatigue is natural.
India’s markets have delivered strong returns over the last five years. Now they are consolidating—like a batsman resting after a triple century. The correction was inevitable. Tariffs may be the trigger, but even without tariffs, some other reason would have caused the fall. After such a big rally, a fall and consolidation was bound to happen. And, historically, this is how it has always been. For the past 10 years, Nifty has given positive returns every calendar year. But it cannot go on like this forever. So, this year the market is in a consolidation phase, but it has also recovered.
We often hear India is a fundamentally strong economy. Could you help decode what that means?
We are like those students who consistently score 60-70 per cent marks and pass. We have the potential to score 100 out of 100, but instead, we settle at 70 and feel happy. If we attempt the full paper, we can get 100. But then, other classmates say: “You got 70, be happy with that; why do you need 100?”
With the US Federal Reserve cutting rates by 25 basis points (bps), will the Reserve Bank of India (RBI) follow suit given the decline in inflation?
I don’t think so. RBI will wait.
Look at it this way—if you fire all your bullets at once, then the pistol loses its value. But if the opponent doesn’t know how many bullets you still have, then even if your gun is empty, he will still fear you.
kundan@outlookindia.com