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The impending doubling of US tariffs on Indian goods, escalating to 50 percent, presents a multifaceted challenge to India's economic ambitions, extending beyond the immediate repercussions on export revenues. The shadow of risk aversion already looms over private capital investment, and the burgeoning trade friction with the United States, India's principal export destination, threatens to decelerate the momentum of the capital-intensive Production Linked Incentive (PLI) schemes. These schemes, designed to stimulate domestic manufacturing and attract investment, are particularly vulnerable to the destabilizing effects of international trade disputes. Prior to the US tariff adjustments, Indian industries had voiced concerns about the tepid domestic demand, which served as a significant deterrent to capacity expansion. This muted demand has manifested in the suboptimal performance of numerous PLI sectors, creating a precarious environment for attracting further investment. Sectors requiring minimal capital investments have witnessed comparatively faster adoption rates, while investors exhibit hesitancy in engaging with sectors demanding substantial capital commitments. The looming trade war exacerbates these challenges, potentially deepening the existing fissures in the investment landscape. Government data, in response to parliamentary queries, underscores the disparity in PLI application clearances. Sectors necessitating significant capital investments, such as Advanced Chemistry Cell (ACC) batteries and high-efficiency solar PV modules, have registered the fewest approvals. Specifically, since the program's inception, only four battery manufacturing applications and fourteen solar module sector applications have been sanctioned, with drone and drone component clearances totaling twenty-three. This contrasts sharply with the robust activity in sectors demanding less capital and exhibiting lower risk profiles. The food products category has seen 182 applications approved, while the specialty steel sector boasts 109 approvals, and the automobiles and auto components sector registers 95. This stark divergence highlights the pronounced risk preferences among private companies, signaling a cautious approach to sectors with higher capital requirements. The prevailing sentiment is further encapsulated in a recent Crisil report, which notes the relatively lower capex intensity of sectors such as mobile, telecom, and pharmaceuticals, which are the primary beneficiaries of the PLI scheme. The report anticipates heightened caution among players in capital-intensive sectors, such as advanced chemistry cells and solar photovoltaic modules. The projected capex uptick, initially slated for post-fiscal 2025, now faces potential disruption due to escalating trade frictions. This predicament coincides with the stagnant revival of private capital investment, in stark contrast to the buoyant public capex. The interview with Ram Singh, an external member of the Reserve Bank of India's (RBI) Monetary Policy Committee (MPC), reveals that companies are prioritizing dividend distribution or equity investments over leveraging their cash reserves for production line investments. Singh emphasizes that private capex remains below the requisite levels for achieving a 7-8 percent growth rate, necessitating a broad-based demand surge to catalyze private investment. A Crisil analysis further illuminates the industrial sector's dependence on trade, revealing that nearly half of the planned industrial capex is susceptible to global trade-related risks. These risks encompass dependence on imported raw materials, reliance on foreign technology, and reliance on export markets. Events such as increased US tariffs, EU climate policies, and over-reliance on China pose significant threats to business continuity and expansion plans, underscoring the sector's vulnerability. The report emphasizes the uncertainty engendered by these events, which could prompt companies to postpone or even abandon expansion initiatives. Sectors such as mobiles, electronics, and solar PV modules rely on China for component imports and the US for export markets, rendering them particularly vulnerable to trade uncertainties. While government support and incentives provide some respite, the inherent risk remains substantial. Conversely, sectors such as cement, which are predominantly reliant on domestic demand, exhibit minimal exposure to external vagaries, rendering them largely immune to tariff-induced disruptions. The significance of the US market as an export destination for India is underscored by its 18 percent share during the last financial year. Over the past five years, India's merchandise exports have witnessed a 5 percent compound annual growth rate (CAGR), with exports to the US growing at a faster rate of 7 percent CAGR. This highlights the importance of the US market for India's export growth and the potential impact of US tariffs on India's export performance.
Trade experts suggest that steep US tariffs could lead to a significant decline in India's GDP growth, potentially reducing it from 6.5 percent to 5.6 percent. However, they also posit that strategic implementation of tax reforms, measures to enhance ease-of-doing-business, and an aggressive export diversification strategy could mitigate the shortfall and enable India to sustain robust economic growth. The new US tariffs are expected to disproportionately impact labor-intensive sectors such as textiles, jewellery, shrimp, carpets, and furniture. However, the consensus is that most Indian firms possess the capacity to redirect their exports to alternative markets and capitalize on the burgeoning domestic economy. This shift in focus could potentially offset the negative impact of the tariffs and ensure continued economic growth. Furthermore, India's economic structure is characterized by a relatively low export-to-GDP ratio, with exports constituting only 20 percent of GDP, compared to 90 percent for Vietnam. This comparatively lower dependence on exports renders India less vulnerable to external shocks, thereby enhancing its resilience in the face of trade-related challenges. The government's ongoing taxation and business reforms are expected to further bolster India's competitiveness, reduce business costs, and position the country to seize opportunities in new global markets. This proactive approach to economic policy is crucial for navigating the complexities of the global trade landscape and ensuring long-term economic prosperity.
In conclusion, the confluence of escalating US tariffs, subdued domestic demand, and risk aversion in private capital investment pose significant challenges to India's economic aspirations, particularly concerning the success of its Production Linked Incentive (PLI) schemes. While sectors requiring lower capital investment have seen some success, the sectors that would truly transform India’s manufacturing base and global competitiveness such as advanced batteries and solar modules are faltering due to lack of investment. The dependence on imported raw materials and export markets, especially the US, further exacerbates the risks. Mitigating the adverse effects necessitates strategic policy interventions, including tax reforms, measures to improve ease-of-doing-business, and aggressive export diversification to new markets. By focusing on these initiatives, India can overcome the potential GDP growth slowdown and sustain robust economic expansion, bolstering its resilience against external shocks. The ongoing governmental reforms are crucial in enhancing competitiveness and reducing costs, positioning India to exploit emerging opportunities in the global marketplace. The future success of India's economic journey relies heavily on its ability to adapt, innovate, and navigate the complex dynamics of international trade while fostering a supportive domestic environment for investment and growth.
Source: Why steep US tariffs could hit India’s PLI push and deepen private capex slowdown?