Donald Trump’s return to the White House brings both opportunities and risks for the Indian economy. Historically, Trump has maintained a strong “America First” policy, often favouring protectionist trade measures.

During his first term, India saw tariffs on several exports to the U.S., and with Trump’s victory in 2024, markets are wary of a similar approach potentially leading to increased tariffs on Indian goods. If Trump reimplements or intensifies tariffs on key exports like textiles, pharmaceuticals, and IT services, it could create headwinds for Indian companies with significant U.S. exposure.

Indian stock markets are typically sensitive to U.S. policy shifts, and any heightened protectionism or new trade restrictions might initially cause market volatility, particularly in sectors reliant on exports to the U.S. The IT and pharmaceutical sectors, both major exporters, may experience near-term declines as investors assess risks of reduced profitability. Large Indian IT companies such as TCS, Infosys, and Wipro, which depend heavily on the U.S. market, could feel immediate impacts if restrictions on outsourcing or higher tariffs are imposed.

On the other hand, if Trump emphasises tax cuts or business incentives as he did during his first term, U.S. growth could increase, thereby boosting global markets, including India. This could also benefit Indian exporters, especially in capital-intensive industries that benefit from favorable U.S. economic conditions. Trump’s previous corporate tax cuts had ripple effects across global markets, including India’s, as they led to increased investment flows and elevated stock market performance. A similar scenario could play out in the 2024 term, offering some stability for Indian equities.

Trade policies and Indian exports: navigating protectionism

A critical factor for India will be Trump’s stance on U.S.-India trade relations. In Trump’s previous administration, India lost its Generalized System of Preferences (GSP) status, which had allowed tariff-free exports of certain goods to the U.S. If Trump continues with his “protectionist” stance, India might face similar restrictions, impacting sectors like pharmaceuticals, textiles, and engineering goods. In recent years, Indian exporters have expanded their U.S. market share, with the U.S. being one of India’s top trading partners. A reduction in trade benefits or the imposition of tariffs could pressure profit margins, prompting Indian companies to explore alternative markets or invest more in domestic markets to offset U.S. market risks.

Further, if the Trump administration opts to limit work visas, particularly the H-1B visa program, Indian technology and services sectors may see increased costs. H-1B visa restrictions can lead to decreased labor mobility, affecting the hiring capabilities of Indian IT companies operating in the U.S. This could pressure Indian firms to allocate resources towards hiring locally in the U.S. at a higher cost, which could strain margins for companies like Infosys and TCS.

While protectionist policies pose challenges, they also offer India an opportunity to strengthen its own domestic manufacturing through its “Atmanirbhar Bharat” initiative. Indian policymakers may look to accelerate reforms in domestic production, self-reliance, and inward investment. This could encourage foreign companies, especially those wary of U.S.-China trade tensions, to consider India as an alternative manufacturing hub. Over time, an inward focus could mitigate some of the risks posed by U.S. protectionist policies, helping India build resilient supply chains and a strong export base.

Foreign investments and currency fluctuations

The U.S. interest rate and monetary policy under Trump’s administration will also influence the Indian economy. A stronger dollar, driven by potential U.S. rate hikes, could lead to foreign outflows from emerging markets, including India, as investors seek higher returns in the U.S. If the Federal Reserve under Trump continues to raise interest rates, the Indian rupee might depreciate further against the dollar. This depreciation, while benefiting exporters, could increase import costs for oil and other essential commodities, driving inflation in India. Additionally, a stronger dollar could affect India’s fiscal health by increasing the cost of servicing dollar-denominated debt.

For the Indian markets, a stronger dollar might result in short-term capital outflows as investors flock to dollar-based assets. Historically, such currency-driven volatility has impacted foreign institutional investments (FIIs) in Indian equities and bonds, causing fluctuations in stock prices. On the brighter side, a lower rupee might provide an export advantage, potentially boosting revenues in sectors like textiles, manufacturing, and agriculture, thereby counterbalancing the capital outflows to an extent.

India may also see shifts in foreign direct investments (FDIs). Trump’s first administration saw significant regulatory changes aimed at attracting investments back to the U.S. If similar policies are implemented, some multinational corporations might shift focus from expanding abroad to re-investing in the U.S. However, India, with its robust growth prospects, large consumer base, and government-backed initiatives, might remain attractive to sectors less impacted by trade tensions, such as renewable energy, digital services, and manufacturing.

Broader economic implications, bilateral relations

Indian policymakers are likely to closely monitor Trump’s policies on international alliances, climate change, and defense, as these could shape India’s broader economic landscape. Trump’s stance on multilateral agreements and alliances, such as his opposition to the Paris Climate Agreement during his first term, could challenge India’s own climate commitments and policy directions.

In defense, India and the U.S. have fostered closer ties over recent years, with the U.S. becoming a significant defense supplier to India. A Trump administration, historically supportive of India’s defense aspirations, may strengthen these ties, particularly in the Indo-Pacific region. Continued defense collaboration could drive technology transfers, investments in defense manufacturing, and joint ventures, all of which could add value to India’s economy.

Further, as Trump has been a vocal critic of China, his renewed leadership might place India in a strategic position to strengthen its geopolitical and trade presence in the Indo-Pacific region. A firm anti-China policy could open avenues for India to increase its exports and investments to fill the gaps left by restricted U.S.-China trade.

Conclusion: preparing for opportunities and challenges

Trump’s victory introduces a mix of challenges and opportunities for India. While the potential for increased tariffs, H-1B restrictions, and a strong dollar could bring short-term volatility, they also present India with incentives to expand its manufacturing, diversify export markets, and enhance economic self-reliance. By closely aligning with strategic allies and implementing resilient economic reforms, India could effectively navigate the complexities of a Trump-led U.S. administration while capitalizing on new growth prospects.

In the coming months, the Reserve Bank of India and other policymakers will play a critical role in steering the economy, ensuring it remains resilient amid global shifts. With careful fiscal management, India can continue attracting investments, sustaining growth, and fostering an environment that is well-prepared for the effects of a Trump presidency on the world stage.

(This article was generated using AI and was reviewed by a journalist)

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