Wednesday, April 4, 2018

We are coming

Looks like all the back-door negotiations have failed and the trade war has become real and staring at us. It is not just US and China. It would spread to other countries including India. We are very much on the radar.

If you see short term economic benefits, US seems to gain from the duties slapped on the international trade. US is the biggest consumer while China is export based economy. This move should make the US Dollar stronger in the shorter term. But at the same time you should not fail to notice the courage displayed by China in slapping back US with equal amount of trade tariffs. China is not standing on the loose ground. China is making arrangements to pay for its oil imports in its own currency avoiding the usage of US Dollar. Whole world is noticing it. Though US Dollar gained against emerging economies, it is falling against Euro and Japanese Yen at the same time.

Message is clear and loud. If you can look further into the future, China has ambitions to make its currency an international one, at the cost of US Dollar. It would slowly get off the vast US Dollar reserves it holds as and when its own currency finds takers. If we assume that Donald Trump continues to remain same in his approach, US Dollar will see serious damage to its valuation in the years to come. Its supremacy in the global market might end and Trump can make it as soon as possible by increasing the intensity of rivalry against China and other countries.

If we assume that US Dollar is going to lose value, it will have a greater impact on India too. Exporters (from India to US) will see their businesses shrinking and becoming infeasible. Talent drain will reverse at a faster pace. India is a consumption major economy unlike China which is export driven. Though two major industries (IT, Pharma) of India will see an adverse impact, rest of India would see things getting better for them with this structural change in the economy. Our currency getting better against US Dollar will help our economy as trade deficits would become thinner and gradually disappear.

Right now we say we are $2 trillion dollar economy with a national income $1500 to 2000 per person per year. If Rupee is going be stronger by 20-30% against USD, our GDP and per capita figures will also be revised by that gain in Dollar terms (though not much has changed in Rupee terms). This will help close the gap between us and rest of the world (mostly with the developed countries).

On PPP terms, India already has a decent ranking and it looks like it will only get better from here, may be at very fast pace than expected earlier. Except China, we can say confidently to rest of the world "We are coming."