Tariffs: Picture Abhi Baki Hai

medium120100323Mighty America was on an unsustainable path of large fiscal deficits (spending more than earning), high current account deficits (consuming more than producing), and an ever-increasing debt-to-GDP ratio. Considering the immense unfunded medical care and social security liabilities, there was an immediate need for course correction.Trump aimed to cut the current account deficit by imposing tariffs, reduce fiscal deficit by curtailing wasteful govt spending through Musk-led DOGE, earn revenue from tariffs, stabilise the debt-to-GDP ratio through a sovereign wealth fund and a revaluation of gold reserves.Some versions of this had played out before. Under Clinton in late 1990s, US govt workforce was reduced by more than 400,000 employees, and fiscal deficit was converted into a surplus for the first time after 1970s, and the last time since then. Plus, US has used tariffs selectively over the decades against countries and items. Imposition of mass tariffs in 1828 and 1930 resulted in a recession or depression.What Trump is attempting on the fiscal side is similar to what Clinton did. However, their approaches are vastly different. Clinton followed a consultative and calibrated approach. Trump is a man in a hurry. The added twist of mass tariffs is complicating the plot. It is like remaking the superhit movie Dilwale Dulhania Le Jayenge combined with the plot of a flop movie like Didar-e-Yaar.The market fears that the unfolding tariff war will create stagflation in US and lower growth in the rest of the world. Lower growth means lower profit (near-term and medium-term), hence the need for a market reset.Tariffs will likely raise inflation for US consumers and create shortages with supply chain disruption, as is witnessed with eggs currently — a dozen eggs costs $12. The US economy is two-thirds consumption. Almost half of household financial wealth is in the stock market. A drop in the equity market could impact consumption through a negative wealth effect.If Wall Street experiences pain long enough, and given the way interconnected feedback loops work in the modern financial system, the pain on Main Street is inevitably a matter of time. We hope (and pray) that Trump has used shock and awe treatment to bring people to the negotiating table and will work out deals to avoid catastrophic consequences for US and the rest of the world.India is an integral part of the global economy. We are highly linked to the global economy through goods and services trade (import and export) and remittance. If America, the engine of the global growth train, slows down or stops, it will affect Indian growth rate in FY26.We will be impacted less than many of our peers as our monetary policy is easing (liquidity is improving, and rates are coming down), and we have fiscal space to spend if needed.Our prudent policy of not allowing China to assemble goods in India and export to America as ‘Make in India’, to circumvent US import duty, has spared us from the imposition of much higher duties like those on Vietnam. We must capture US markets from peers in segments like textiles, footwear, toys, consumer durables, etc. While US consumer demand is likely coming down with the tariff war, we still have to take our chance to capture business from our peers.Further improving the ease of doing business will support our entrepreneurs in capturing the opportunity. We will have to be proactive in dealing with excess Chinese manufacturing capacity. They should not be allowed to dump goods in India that they can’t sell in US. We can bridge the trade deficit with increased imports of US energy and defence equipment.Our markets are fairly valued in the large-cap category. Predicting market movement will be futile, as unfolding events will drive it. In the short term, flows can drive the market. In the long term, fundamentals drive the market.Our fundamentals are intact despite the short-term adverse impact of tariffs. Our govt is proactive in managing the situation with bilateral negotiations, and we’re likely to emerge as a winner in the medium term from the tariff war, if we play our cards as well as we are playing right now.Investors must follow the dharma of asset allocation. Large caps are fairly valued, but mid- and small-caps are still a little expensive compared to historical averages. Maintain a neutral allocation to equity as an asset class with a large-cap bias.Consumption will likely get a boost from tax rebates, a drop in EMI burden with falling interest rates, and 8th Pay Commission awards that’ll be implementated next year.Spending is likely to be focused on discretionary space like durables, electronics, travel, QSR and the premium end. Domestic themes like cement/building materials, banking, and financials will outperform the market. Keep cash to buy in the market correction, but don’t hurry to deploy, as Trump will give you enough opportunity to buy.DDLJ + Didar-e-Yaar? Picture Abhi Baki Hai.The writer is MD, Kotak MF