India: What is the impact of the next US president?

At the time of writing it is still not clear who will be the 46th president of the United States in a historic nail-biter election. Trump has called victory, but given that the ballots are still being counted, this call is premature. Whomever will be the next US president, his political course will have a far-reaching impact on geopolitics, markets and global trade. In the short term, markets will surely will be shaken up and volatility is expected to remain high afterwards, as the election result is threatened to be disputed and a ruling might end up in Court.

Impact on INR

We think a Trump win will raise economic policy uncertainty, which will trigger a risk-off sentiment in financial markets and lead to a stronger US dollar. In case of a Biden win, we expect markets to switch to a risk-on mode, although the response will be dimmed as the Senate is likely to remain in Republican hands; something which complicates the execution of Biden’s policy plans. All in all, we expect USD/INR to spike after the election result becomes clear to 75 in case of a Trump win, and 73.8 in case Biden turns out to be victorious (Figure 1).

Trade and GDP

The policy plans of both candidates pan out differently on global trade as well. In this study, we argue that Biden’s plans push up US exports against the baseline by 6-7% in the medium to longer term. As the United States is India’s most important trading partner (17% of all Indian goods are shipped to US shores), higher US import will also enable India to export 2.5 to 3.5ppts more in total than under a Trump regime, supporting the economy by roughly 2% in total in the medium term (see Figure 2).[1] More in general, we expect Biden to more strongly favor the multilateral route compared to Trump. For instance, a Biden administration is more likely inclined to lift the blockage of judges for the World Trade Organization’s highest dispute settlement body, the Appellate Body. The Trump administration has refused to appoint judges to the body, leaving the dispute settlement system of the WTO in limbo since December 2019 (see this report for more information). Biden also wants the WTO to reform, but in contrast to Trump finds the multilateral organization a useful tool as well.

[1] In terms of the significance of the US market, 75% of India’s crustaceans are exported to US shores, 50% of all carpets and textiles, 40% of all furniture and 40% of all Indian pharmaceutical exports.

Knowledge spillovers

There is significant chance we are underestimating the positive impact of Biden’s policy on the global economy. Biden wants to invest $300bn in R&D to stimulate development of breakthrough innovations in the field of, for instance, electric vehicles, 5G, artificial intelligence. In addition, he wants to invest $850bn to $1,900bn in education. Both plans will likely foster knowledge creation and prop up the innovative capacity of the US, which is likely to spill over to other parts of the world. Indeed in the past, US innovations, such as the laser, chemotherapy, GPS, hearing aids, manufacturing assembly lines, gaming consoles, 3D printing, internet, smart phones, a bio-artificial liver, digital photography, all changed everyday life across the globe as we know it. It is also well-known that countries are able to benefit from technological change of the technological leader, which is in many cases the US (see this study), and the effect is significant. However, as uncertainty on the magnitude of international knowledge spillovers from a US innovation agenda is so large, we have not quantified this effect in our policy impact assessment.

Impact on geopolitics

On foreign policy, Biden is likely to adopt a multilateral route and re-join several organizations like the World Health Organization (WHO), UNESCO, as well as international agreements, such as the Joint Comprehensive Plan of Action (i.e. the Iran nuclear deal) and the Paris Agreement on Climate Change. Trump on the other hand is expected to deal with matters bilaterally.

However, we don’t expect that both candidates will take a different stance against China. Both Biden and Trump have promised to step up their game against China, something that resonates with their voters. Research by PEW research indeed shows that a rising unfavorable opinion of China is not only visible with Republican voters, but also among Democratic ones (Figure 3). As a consequence, Biden will probably not roll back the China import tariffs that Trump has installed and probably keep political pressure on the lid towards China.

The latter is also where India comes into the geopolitical equation, as both candidates will likely reach out to India as strategic partner in order to shape a military balance in Asia. This direction has been emphasized by U.S. Secretary of State Mike Pompeo during his visit to India in October.

As we shift our focus to the domestic economic developments, India continues to show worrying inflation dynamics. The September print came in at 7.2% (y/y), with food prices and core inflation contributing 4.5ppts and 2.7ppts, respectively (Figure 4). Especially cereals, meat and fish, vegetables, oils and dairy pushed up food prices. Within core inflation, COVID-19-related products show the largest surge in prices, ranging from air tickets, hotels, transportation, mobile phone charges and furniture maintenance charges.

With March being the exception, headline CPI has been hovering above the upper-band target range of the Reserve Bank of India (RBI) for ten (!) consecutive months. The RBI already delivered 115bps of rate cuts earlier this year and given its accommodative stance, it has been looking for a window to cut further, but that window has yet to present itself. What is especially worrying is that within core inflation, prices of services are increasing fast as well, which might indicate high inflation is becoming anchored in higher inflation expectations. The RBI’s forecast for the October-December quarter of 5.4% already seems overly optimistic. Against the backdrop of local lockdowns being kept in place causing supply-chain disruptions and food prices levelling off very slowly, we expect inflation to arrive at 6.0%, which means the RBI will reluctantly be forced to maintain a status quo.

GDP numbers for calendar Q3 in the US, France, Italy and Spain came in more positively than we expected. Also in India we see more promising monthly data than expected, with passenger car sales up in September by 4.4% (y/y) and PMI’s (both manufacturing and services) recovering as well. Running these figures through our nowcasting models, we arrive at a contraction for calendar Q3 of -11.0% (see Figure 5), up from -15.4% forecasted earlier. This brings our GDP forecast for the entire fiscal year 2020/21 to -9.4% y/y (Table 1), up from -10.5% earlier.

With monetary policy not able to provide the necessary relief, the government is still the only actor able to undertake action. On 12 October, Finance Minister Sitharaman announced a third round of stimulus of INR 740bn (roughly USD 10bn), aimed at raising investment and propping up private consumption. Our calculations show that the package will support economic growth by 0.1ppts in fiscal 2020/21, and 0.2ppts in 2021/22. Against the backdrop the substantial expected GDP contraction, the third package is not very meaningful. The small size of the third stimulus package also underlines that the hands of the government are tied, given the significant deterioration of India’s fiscal position.