Tariffs opening gambit for negotiations; India’s key exports positioned at a lower tariff compared to rivals: Rajeev Agrawal

What is your reaction to the Trump tariffs? Aggressive, you think?

Rajeev Agrawal: The good news is now we know what the tariffs are. And I do think that the tariffs will change the supply chain of the world, because now you will have to figure out how you get goods into the US in the most competitive manner. But the rates have been higher than what was being projected. So, yes, it is being a little bit on the higher side. I personally think this is really the starting gambit where the negotiations will begin and he wants to come in strong and ensure that people come to him and the negotiations are easy negotiations. I feel that’s where he is coming from.

For countries like India, there is a blanket 26% tariff imposition. Given that we have had our own cycle of correction and on our way to rebound, the FPI, FII money is finally trickling back into the equity markets. The GIFT Nifty this morning was down only 100 points. We have had it much worse until March. What does it mean for India equity market watchers?
Rajeev Agrawal: Actually, India has not really been impacted that badly in this tariff because we have to look at what are the goods India is exporting and what are the competitors for those goods. India is at 26%, but China is at 34 plus 20%, which is 54%. So, really, India does get an advantage vis-a-vis China.

In textiles, Bangladesh was a big exporter of textiles and it is at 37%. Vietnam is getting hit with a 44% tariff on electronics and across everything, but Vietnam is a big electronics exporter. India tariff is 26%. So, in many of those segments, where India is competing with other countries for similar products, India is in a better situation and that is what is getting reflected in how the Nifty is behaving in the futures market.

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Let us look at how the sequence of events could move. There could be diplomatic talks. There could be renegotiations. So, can I say that whatever the fine print would be, it would certainly be much better than what the current tax tariff rollout has been because these are, in a sense, ceiling rates. The real negotiation will happen much below the ceiling rate now.
Rajeev Agrawal: Yes, definitely to your point the negotiations will begin now. But till these negotiations go on with different countries at different pace, the dynamics of these negotiations will keep the market on the tenterhooks for a long time.

The one other thing that I want to point out is the gems point. Given that tariffs have been imposed means the cost of goods for the US consumers goes up and clearly that will be inflationary, which will prevent Fed from cutting rates, especially if there is inflation, which means that the cost of capital is going up and that will be another big drawdown in terms of the stocks and how the markets will behave. Those are the two points I would say.

Can I take this point forward and say that, if tariffs are coming, that is actually bad news for the US first and the rest of the world after that?
Rajeev Agrawal: I absolutely agree. Tariffs will definitely increase the cost for the US consumers. It will slow down the economy, there is no question about it, because the consumer is a very big portion of the economy and so they will be hit. Whether there is offset on the other side in terms of tax exemptions and so on, which will help, remains to be seen. But I would expect that the consumers will slow down and the cost of capital will go up because the Fed will not be in a position to lower the rates if the economy slows down, especially if the inflation is high.

So, on the cost of capital side, things start looking worse because of the tariffs in the short term at least. In the long term, as the US builds out its base on the industrial side, especially for important technology, it is pretty important that the US builds strong capabilities in technologies which are critical for its long-term success. That will be helpful over the very long term. But in the short term definitely a challenge.