Anish Tawakley, co-CIO Equity of ICICI Prudential Mutual Fund, on what US tariffs mean for Indian industry and markets, their impact on the pharma sector and domestic demand driving growth. The session was moderated by Sandeep Singh, Resident Editor, Mumbai
The US has a very strong economic output today but is constrained by the number of workers. US unemployment is at a multi-decadal low. If you impose tariffs, output will not increase – that’s the first thing. Second, if you want to import less and cannot increase domestic output, then you have to consume less. Your standard of living has to drop.
Finally, the capital and current accounts are two sides of the same coin. Capital inflows either lead to current account outflows, or you have to increase reserves. The US doesn’t maintain reserves because the dollar itself is the reserve currency. If you want to attract investment, meaning we want an inflow on the capital account, you are by definition saying that we’re okay running a current account deficit.
And, if you want to reserve currency, which again is an objective of the US, it means you want to attract foreign capital. Ultimately, the laws of economics cannot be outlawed.
On the impact of tariffs on India and its markets
There will be industry-specific impact and it’s difficult to gauge all of them, but on major Indian exports, say pharmaceuticals, let’s understand the dynamics. More than one-third of the volume of drugs consumed in the US are made in India. When you levy a tariff, depending on the specific supply-demand situation, part of it has to be borne by the consumers and part by the producers. Overall, I do not think there will be a major impact. Many of the factors that will determine how the economy does overall will be domestic. Our current account deficit is fine, at about one and a half per cent of the GDP. The bigger driver of the Indian economy will be continuing to build houses, manufacturing goods and continuing to expand cities. I think the concerns about specific tariffs are unmerited.
If you look at the DXY, which is a composite measure of the value of the dollar, it has already started dropping. So, it’s not that the rupee movement is unique. The most important variable is the current account. If the current account is fine, then I don’t see an economic reason why the rupee needs to depreciate. The current account reflects the realities of the economy and the capital account. If people continue to take their money out, it may be under pressure for some time. If the economy starts growing again, the flows will return. I do expect the economy to regain momentum, and if that happens, there is no fundamental reason why the rupee should continue to depreciate.
On how markets may adjust to the new realities
It’s not only the reality of the external world that the markets are reacting to. The Indian economy also slowed down in the past six months. Now, does it reflect any fundamental macro-economic instability in the economy? No. The current account deficit is fine, inflation is fine, corporate balance sheets are healthy and bank balance sheets are healthy.
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The only thing the economy is suffering from right now is weak demand. That is an easily solvable problem which can be corrected using fiscal and monetary policy. Capital flows will also come back once the momentum returns. As long as the foreign institutional investors (FIIs) are supportive, there is no reason to believe that the economy will continue to languish. Additionally, I believe we need the housing sector to do well for the economy to sustain its recovery, and housing prices should not rise to levels which kill economic activity.
In the last six months, we’ve seen some fall in the rate of absorption of housing, so new sales have declined a little bit. I would hope that there’s enough competition in the market so that developers bring prices to more reasonable levels and housing activity recovers.
Tax reliefs help spur consumption and investment spending. Equally important is monetary policy, to the extent that RBI has eased some of the regulatory constraints and provided liquidity and cut rates. I think monetary support is really the support that would be ideal for the economy.
If you go back to the previous cycle, 2008 to 2013-14, and you see what happened in the Indian economy, there was a global financial crisis but the economy recovered really fast because there was both a monetary and a fiscal stimulus. The problem came later because the fiscal stimulus was not withdrawn, and it is always very difficult to withdraw. Continued government spending led to overheating of the economy. Monetary stimulus, on the other hand, can be more easily reversed.
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On stabilisation of fund outflows
I believe if you’re investing in equities, you should have at least a three-year view or not invest. There will be multiple times that investors enter and exit, and it will not matter because when they go out, you can increase your investment. What will matter is earnings growth. A simple way to think about it is that flows impact multiples over the short term. Over any reasonable period, the multiple is a very small driver of the returns you generate; the earnings growth is a far bigger driver. And earnings growth, I think, clearly depends on the domestic.
The notion that investment did not pick up continues to be a pervasive notion, which defies the data. Cement, steel and real estate have seen investment. In power, the situation has changed now for everyone because renewables require less CapEx and a lot of the CapEx capacity addition has been in renewables. While the capital investment number looks smaller, actual capacity creation has been pretty adequate.
On whether tariffs on China could benefit India
I don’t subscribe to that view. If we want to attract investment into the country, we will run a current account deficit. That’s a mathematical reality. Whether you want to attract investment or supply investment has to be decided. In my view, India can use additional capital to supplement our investment. We will have a comparative advantage in exporting stuff that we may be good at, like the fact that we are a net exporter of services, but we will need to import goods. What is needed, therefore, for manufacturing to grow is domestic demand.
Housing is a big determinant of demand. All durable goods demand you have a house. If you have a small house with five people living in a room, there’s only one fan, there’s one AC, a limited amount of clothes and shoes they can buy. If you have a larger house, you will buy more goods, and manufacturing will do well automatically.
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On the reduced impact of tariffs on India as compared to China
The India-China comparison is flawed. Both play fundamentally different roles in the global economy. China is a supplier of capital. It is buying the US government bonds, which allows the FIIs to have funds to invest elsewhere in the world. We are a recipient of capital. Economic laws will prevail and bilateral agreements may happen between the US and India for more relief from tariffs. Despite the very high degree of uncertainty about what people will do, there is enough economic theory for us to understand what the implications of a certain action will be and that should be focussed on.
On whether India should worry about dumping
In economics, dumping has a very specific connotation. It refers to when your domestic price is higher than your export price. If some prices are lower in China, say of steel, then even the export prices can be low. Price levels can still fall to the point that Indian Industries come under pressure, but does it really hurt the country? That steel can make more cars and two-wheelers at more affordable prices.Tariffs hurt some people and help others. In this example, the profitability of steel companies would suffer but other industries would benefit.
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