India has been experiencing bilateral difficulties with the United States. The economic dimensions of these difficulties are expected to impact India adversely. First, the US is India’s biggest export destination, and so tariffs, both economic and geopolitical, will adversely impact India’s current account deficit and economic growth. Second, the Trump administration’s nativist base wishes to limit foreign access to jobs. They see Indian skilled immigrants as a prime political target. Since the US is the favoured emigration destination for educated and upwardly mobile young Indians, this hurts them, especially at a time when their economic prospects within India are at their bleakest this century.
In my analysis, the macroeconomic impact is manageable. India has enough foreign exchange reserves to comfortably finance a temporary widening of the current account deficit if exports and remittances fall, offering temporary elbow room to diversify. There is also scope to moderate imports, especially of luxury discretionary consumption, which has been spiralling in recent years.
However, the picture is different for the peninsula—the five southern states.
As India’s premier manufacturing state, Tamil Nadu will take a hit. Thirty-one percent of the state’s exported output goes to the US. Thirty percent of Tiruppur’s garment exports go to the US. The Tiruppur exporters association estimates that this will cost the industry ₹6,000 crore. Fresh orders have stalled; existing orders are on hold. With average margins of just eight percent, the sector cannot absorb the tariff shock and remain competitive. Tamil Nadu also accounts for 37 percent of India’s electronics exports, a large chunk of which goes to the US.
The impact on Karnataka will be more in the services, especially the IT sector, though aerospace components, petrochemicals and hydraulic and electrical machinery are also exported to the US. The IT services sector generates many jobs, so cutbacks in this sector will have a derivative recessionary impact on domestic demand as well, especially in the Bengaluru-Mysuru belt, which contributes 60 percent of Karnataka’s GSDP.
For now, Telangana will be less affected than Karnataka, as it is more diversified. While IT exports are sizeable, pharmaceuticals, biochemicals, medical, and business process services exports are also important players in Telangana’s growth story. These have also generated spillover effects in Andhra Pradesh (particularly Vishakapatnam). However, if tariffs begin to impact the medical and medical services industries, then the hit to prosperity will be sizeable.
Andhra Pradesh is the poorest state in the peninsula and, therefore, less hit by tariffs on goods, as is also the case with the wealthiest state, Kerala. They export spices (Kerala) and seafood (both) to the US. These are employment-intensive activities. However, the impact will be cushioned if suppliers are proactive, as these exports are highly geographically diversified.
Curbs on skilled migration will also impact the southern states. Andhra Pradesh, Karnataka and Telangana are major suppliers of H-1B visa labour to the US. Its consulate in Hyderabad is the largest in South Asia because of the volume of demand for its visa services. Telugu speakers are the largest pool of Indian immigrants in the US. With curbs on further growth, the direct and indirect (through remittances and investments) impact on the prosperity of these three states could be significant. Kerala and Tamil Nadu will also be impacted, but their emigration flows to the US are smaller and higher-end. High-end emigration faces more relaxed barriers under the new US wage priority system.
There is also a silver lining that leverages the peninsula’s high human development and investment in (relatively) attractive metropolitan cities. A consequence of restricting low-paid, insecure H-1B work in the US would be the reduction of huge earnings from investment in patented innovations in IT, fintech, aerospace, medicine, biotech, and business process engineering. These investments have driven the vast increases in wealth in the US in contemporary times. New York, Houston, Chicago and Silicon Valley are not going to give these up to Trump without a fight. Hence, they will try to offshore these activities to less costly locations. They know from the H-1B migration that the supply of cheap, low-end tech labour is abundant in India. Hence, the rapid rise of Global Capability Centres (GCCs) in all peninsular cities, especially Hyderabad. This will replace export income with domestic income, which will temper the impact of Trump’s policies on the peninsula (but not on India’s trade balance).
The disproportionate impact of Trump’s protectionist and nativist policies on the peninsula is a result of its economic and human development success. The peninsula is, and has been, the most modern and forward-looking part of India for at least the past 35 years. Its prosperity is in no small measure linked to its success in maintaining profitable relationships with overseas trading partners and the export of a skilled workforce, especially to the US. The rest of India is more insular, less skilled and less oriented to profitable overseas relationships and, therefore, will suffer much less from the ravages of Trump and his minions.
The peninsula is resilient to such adversity. I see great confidence among political and business leaders that they will be able to structurally overcome the challenges through increasing the range of diversification, negotiating with existing customers on cost-sharing these tariffs, and seeking ways to increase productivity rapidly. The governments of all the states have also responded with alacrity to the opportunity that GCCs afford.
In fact, Trump may have done the peninsula a favour. I have been arguing that the next round of prosperity will come to the peninsula not through competing on cheap labour but on demonstrating increased productivity and doubling down on investments in human capital, research and development, and process engineering, to produce—for India and the world—products at the higher end of the value chain.
This is not something in which the Indian government is interested, or even competent to address. If they can maintain macroeconomic stability (a big if) in the face of this shock, that is enough, thank you. It is for the business, political, and intellectual leaders of the peninsula to rise to meet this epochal challenge.
Rathin Roy | THE PENINSULA | Distinguished professor at Kautilya School of Public Policy, Hyderabad; visiting senior fellow, Overseas Development Institute, London
(Views are personal)
(rathin100@gmail.com)