US-China trade war: How it will impact India’s economy and trade
The ongoing US-China trade war has once again rattled global markets. While India may not be directly in the crosshairs, the tremors are being felt across its economy—from gold prices soaring to record highs in both Indian and international markets on Friday, driven by strong safe-haven demand, a weakening US dollar, and rising speculation around aggressive interest rate cuts by the US Federal Reserve.
Regarding Indian equities, US President Donald Trump’s 90-day pause on tariffs lifted investor sentiment in an otherwise gloomy environment. This development led to strong gains in benchmark indices, with both the Nifty 50 and BSE Sensex closing higher.
Both Sensex and Nifty rose nearly 2 per cent on Friday, signaling a robust rebound in Indian equity markets. The same day, the Indian rupee rallied by 64 paise against the US dollar, settling at Rs 86.10.
The US dollar declined sharply against major currencies following Trump’s decision to pause certain tariffs, “causing the dollar index to fall below the 100 mark for the first time in three years,” according to reports.
The pressing question now is: What’s next? India may not be directly in the line of fire in the US-China trade war, but the country remains vulnerable due to the unpredictability of the situation. The value fluctuations of currencies such as the dollar, euro, yuan, and yen have the potential to alter the landscape of international trade, affecting pricing, market access, and profit margins for many countries.
Tariffs, trade, and currency
Trump’s surprise decision to pause certain tariffs has created uncertainty, leading investors to reassess their positions and contributing to the dollar’s decline.
The tariffs on Chinese imports were raised to 145%, effective immediately, prompting Beijing to respond with a 125% tariff on US goods.
Meanwhile, the Indian rupee gained 64 paise against the US dollar, closing at 86.10. This was a strong recovery for the rupee, which had previously dropped to a four-week low of 86.70 against the US dollar earlier in the week. By Friday, it had risen to 85.95 before settling at 86.10, up 59 paise.
The ongoing economic conflict has also sparked speculation that China might weaken its currency, the yuan, which could have a ripple effect on other currencies, including the Indian rupee.
India-China trade and deficit
According to the India Brand Equity Foundation, which is a trust established by the Department of Commerce, Ministry of Commerce and Industry, India exported 4,186 commodities to China in FY24.
“India’s exports to China stood at USD 16.65 billion in FY24, compared to USD 15.30 billion in FY23.”
“Major exported items from India to China include Iron ores (USD 3.63 billion), followed by Engineering Goods (USD 2.65 billion), Marine Products (USD 1.37 billion), Organic and Inorganic Chemicals (USD 1.23 billion), Petroleum Products (USD 1.16 billion), etc, in FY24.”
“Major exported items from India to China include ores, slag and ash (USD 1.22 billion), mineral fuels, mineral oils and products of their distillation; bituminous substances; mineral waxes (USD 846.93 million), organic chemicals (USD 835.63 million), fish and crustaceans, molluscs and other aquatic invertebrates (USD 801.62 million), nuclear reactors, boilers, machinery and mechanical appliances; parts thereof (USD 774.96 million) during April-November 2024.”
“India’s export to China stood at USD 9.20 billion during April-November 2024.”
China has urged India to stand together against US-imposed tariffs, calling Washington’s latest trade measures an “abuse” that harms developing economies.
However, the reality remains that the trade imbalance with China is the largest single deficit India faces with any country.
India’s manufacturing sector heavily relies on Chinese components, especially in electronics. Additionally, the pharmaceutical sector depends on China for nearly 70 per cent of the active pharmaceutical ingredients it uses. India’s automakers also import EV batteries and specialty metals from China.
Moreover, with the US and European markets tightening, Chinese producers may be looking to offload excess inventory into alternative markets like India, potentially affecting local producers. Some items may also become more expensive, according to analysts.
The positive outlook
On the bright side, unlike China, India has adopted a more cautious and measured approach in handling the tariff issue, which may ultimately work in its favor.
Reports suggest that India could finalise a provisional trade agreement with the Trump administration within 90 days.
The US acknowledges the importance of India, but any potential breakthrough will have to be based on the mutual benefit of both countries. If talks proceed well, India’s cautious approach may give it a “first-mover” advantage in the region.
India