India’s Growth Of Economic Output Isn’t A Happy Story After All
It comes even as the world at large suffers at the hands of US president Donald Trump’s decisions.
While Indians have reason to be cheered, at least at first glance, by the higher-than-expected growth of economic output in the January to March quarter of 2025, the world at large continues to be tossed and tumbled by the waves of uncertainty radiating from the White House under its current occupant.
President Trump has successfully obtained a stay on the International Trade Court’s verdict against his “Liberation Day” or reciprocal tariffs.
However, he has asked all countries to come up with their best offer within a short negotiating window, probably anticipating fresh legal challenges to the tariffs that remain to be settled bilaterally — all of them, save those agreed to with Britain.
Trump has doubled the import duties on steel and aluminium, to cheers from the steelworkers’ unions. However, for the variety of industries that use finished steel as an input, this represents additional raw material cost, and a competitive disadvantage vis-à-vis imports of the goods they produce.
They now have to lobby for higher import duties on their produce to stay competitive vis-à-vis imports. The end consumer has to bear the specific higher cost passed on to her, and the generalised impact such price increases have on the overall rate of inflation.
The US has imposed a travel ban on 12 nations and a partial travel ban on seven others. India does not figure in these lists. However, Indian students hoping to study in US universities are affected by the halt to visa application processing announced by the US administration, in order to facilitate social media vetting of the applicants.
Does this amount to restricting the freedom of expression of would-be students of US universities? Of course not. The US would simply use its freedom to decide what kinds of students should be welcomed into the US, leaving the students free to exercise their freedom to study at a non-US university.
Friends No More?
Elon Musk has left active service with the Trump administration, and proposes to focus on running his businesses. However, he took time out to attack, on social media, Trump’s Big Beautiful Bill, the budget bill that will slash taxes for the rich and social welfare and Medicaid for the poor, and add some $2 trillion to the US national debt. Musk called the bill an abomination.
The Trump administration’s efforts to undermine the credibility of the dollar are creating problems for Asian currencies. Hong Kong will soon be forced to abandon the fixed link of the Hong Kong dollar to the US currency, given the increasingly persistent gap between Hong Kong and US yields. The appreciation of the Taiwanese dollar would, fear Taiwanese business, hurt Tainwan’s export competitiveness.
Strengthening Euro?
The European Union has decided to welcome Bulgaria into the eurozone, with effect from January 1, 2026. That would make Bulgaria the 21st member state, out of the EU’s 27, to adopt the euro as the national currency. This is a sign of the euro’s strengthening, although that by itself will not make the euro the ready alternative to the dollar, as the dollar prepares actively to abdicate its throne.
Alongside the damage to US growth and price stability that Trump’s policies have wrought and threaten further, US readiness to renege on assorted obligations to the outside world makes the dollar increasingly unfit to continue as the anchor currency of the global financial system. For the euro to succeed the dollar in that role, the EU will have to get its own house in order, issue joint euro debt — at present, the different debt issuances by different EU member states have different degrees of risk attached to them, and carry different yields — and invest in productivity and innovation boosting institutions and infrastructure.
European coherence faces its own challenges. The newly elected Polish president is guaranteed to thwart prime minister Donald Tusk’s efforts to make Polish laws and institutions more in line with EU requirements.
In the Netherlands, the withdrawal of Geert Wilders’s party from the right-wing ruling coalition has led to the collapse of the government. Fresh elections could throw up a government further to the right than the one that has disappointed the anti-immigrant Mr Wilders.
In South Korea, Lee Jae-Mung has emerged victorious in the presidential elections, and he is of a liberal persuasion.
US-Iran Nuclear Talks
The Trump administration is going ahead with the talks to arrive at a nuclear deal with Iran. The outline of the deal visible as of now looks very similar to the one that Trump walked away from in 2018, leaving Iran to amass greater quantities of uranium enriched to 60% purity and more.
In this, Trump’s priorities differ from those of Israeli prime minister Benjamin Netanyahu, who just wants to bomb the Iran nuclear programme to smithereens.
However, the US is collaborating with Israel in its new food distribution scheme in Gaza, replacing the UN system that Israel claims facilitates diversion of supplies to Hamas.
Israel is distributing enough food to deflect a charge of using hunger as an instrumentality of war but not enough to keep Palestinians from fighting amongst themselves for some food to keep their families alive or to prevent acute malnutrition that stunts babies. Bollywood villain Ajit would approve, but few others.
The UN, and all humanitarian agencies involved in Palestine, are aghast.
Russia-Ukraine Escalates
Ukraine has carried out two significant strikes against Russia. In one, truckloads of small drones were smuggled into Russia, and stationed near air bases with strategic bomber aircraft. The swarms of drones were remotely set free from their holding crates and directed to attack the bombers, and these took out a fair bit of Russia’s strategic strike capability.
In a second attack, Ukrainian marine drones destroyed several pillars of the Kersch bridge that Russia had built to supply its naval base at Sevastapol, in Crimea. Both were brilliant successes from a tactical point of view, and, at the same time, big strategic blunders.
The destruction of the Kersch bridge proves Russia’s point that it needs assured land access, in order to keep Russia’s only warm water naval base at Sevastopol, Crimea, viable. And the road to Crimea from either St Petersburg or Moscow runs through eastern Ukraine. Russia will double down on its claim to the Russian-speaking eastern Ukraine.
The attack on Russia’s strategic bombers deep inside Russia shows that Germany’s removal of restrictions on where Ukraine could hit with German long-range weapons was redundant –Ukraine’s ingenuity would suffice.
At another level, this invites the full fury of Russian military capability. Cluster bombs and thermobaric bombs that create a fireball in the sky, suck out oxygen in a locality and choke people on the ground are no longer off the table, for example. The war escalates, and there is no immediate prospect of a ceasefire.
Glittering GDP, Gritty Reality
Automobile production in India is impacted by the need to apply for and obtain licences to import rare earth magnets from China. These magnets go into the assorted motors that operate the braking system, assist steering, wind windows up or down, or perform other functions inside the car.
There are two possible solutions to this dependence on China for vital magnets and rare earths used in electronics and other bits of modern manufacturing. One is to find alternate sources and develop the refining of minerals outside China.
Rare earths are not all that rare, in terms of supply. But refining the needed metals out of the mineral is a complex process. It would have to be mastered.
Another solution, particularly in the case of motors, is to shed dependence on rare earth magnets that are vital for motors driven by magnetic induction.
Magnetic reluctance is another electromagnetic property that can be used to run motors, but these call for supplementary micro-electronics to control the speed of the motor.
The reason why the initial enthusiasm over better-than-expected GDP growth numbers for the January-March quarter soon peters out is that the growth of the gross value added is much lower than the GDP growth. GDP is the sum of gross value added and product/service taxes net of subsidies. GDP growth at 7.4% was much higher than GVA growth, at 6.8%, because of the higher incidence of net taxes. That is not such a happy story, after all.
