Jet Deal Shows India Won’t Trade Security For Trade Promises
Advanced American jets come with intelligence dependencies that India appears unwilling to accept.
The Gist
US Economic Data and Stock Market Response
- The Federal Reserve is unlikely to cut interest rates as inflation remains above the target of 2%, dampening market expectations for liquidity.
- The US market's trends influence global markets, causing Indian indices to decline in tandem with American stock performance.
Sometime in the dim past, good news for the real economy used to cheer the stock market. Those times have disappeared like traditional incandescent lamps. Robust US jobs data for January has sent markets into a chill. Unemployment is a low 4.3%, and the US economy created 130,000 jobs off the farm, higher than for any number in 2025. If the economy is going strong, there is no reason for the Fed to cut rates to boost economic activity and create jobs.
Unlike India’s central bank, the US Fed has a dual mandate: it has to set policy rates bearing in mind price stability and the level of employment. Inflation is still above the Fed’s target level of 2%, so there is no reason to change the policy rate of interest on this count.
Financial markets are awash with liquidity, and changes in liquidity serve as the primary determinant of stock price changes, rather than changes in expected changes in corporate fortunes. In such a circumstance, good economic performance discouraging the need for stimulus supplying rate cuts signals no addition to liquidity and markets stagnate or fall.
The US market is the trend setter for the world, and Indian markets have come down in step with the American stock indices.
Rafale Over F-35
India has cleared the proposal to buy 114 more Rafale fighter aircraft, ahead of French President Macron’s visit to India later this month. This makes it clear that India is not in the market for F35s from the US.
The simple fact is that US advanced weapons systems are locked into US intelligence systems dependent on US satellites and constantly updated information on the makes and specifications of potential enemy targets. If there is a chance of such intelligence not being shared for whatever reason, having the hardware alone would not be particularly useful.
India’s agreement to buy $500 billion of US goods over the next five years, as part of the framework agreement for an interim trade deal between India and the US, should not make India scramble for easy options to meet the purchase obligation. The decision to opt for Rafales makes sense in this regard. India has also decided to purchase SCALP cruise missiles, jointly developed by France and Britain.
Soybean Imports Threaten Farmers
India will import soybean oil but not soybeans, it has been clarified, as part of the trade deal with the US. This does not offer great comfort to soybean farmers in India: the major use of soybean is as oilseeds, and if the oil itself is to be imported, the demand for soybean would definitely fall.
The demand for soybean meal, what remains after the oil is pressed out from the soybeans, will also come down, thanks to the liberalised import of Dried Distillers’ Grains with Solubles, the residue of the fermented mash after it is distilled to take out ethanol. This is considered a protein-rich feed for animals, poultry and fish. The trade deal would, in other words, let those who rear food thrive at the expense of those who grow food.
It has also been clarified that India would strive to import $500 billion worth of goods from the US, rather than commit to importing that volume from the US. This makes the deal look less onerous.
Japan Yields To Charisma And Takaichi Trade
For the first time in its post-War history, Japan has a government with a supermajority in the Diet, a little over two-thirds of the seats going to the party of the Prime Minister, Takaichi Sanae, who has suddenly transformed from a dour, long-serving legislator to the charismatic first woman prime minister of the country. She is not stylish in her clothes or appearance, and repeats the Japanese word for work half a dozen times at a stretch to make clear what she stands for. But she also plays the drums — was, in fact, the drummer for a heavy metal band in her youth — and rides motorbikes.
Japan has not had many charismatic leaders. Junichiro Koizumi, prime minister during 2001-06, was the last leader to ooze personal charisma. Shinzo Abe, while the longest-serving prime minister and Takaichi Sanae’s mentor, lacked the kind of personal sparkle that lights up Takaichi Sanae’s current avatar. She had become PM as the result of an inner party election, and sensing popular enthusiasm for her leadership, called a snap election, which she won handsomely on February 9.
Her electoral platform promised consumption tax cuts and a step up in fiscal outlays, even as Japan’s ratio of debt to GDP is 130%, one of the highest in the world. The normal reaction to the electoral success of a politician who promises to spend big while cutting taxes would be for the financial markets to turn nervous, send yields soaring and stock markets jittery. Takaichi Sanae’s resounding victory has had a surprising effect. Stock prices are soaring, experiencing what has been called the Takaichi Trade.
Political stability, fiscal stimulus and consumption tax cuts are expanded to help sales and boost profits. The expectation is that Takaichi Sanae would step up defence spending, and defence and heavy machinery stocks are going up.
While yields spiked immediately after the election results came out, they have come down a bit and stabilised. Japan has little to worry about on the macroeconomic front right now.
Higher yields on Japanese government bonds would disturb the yen carry trade, but that is not Japan’s problem.
New Leadership In Dhaka
The interim government of Bangladesh, headed by Muhammad Yunus, is poised to give way to an elected government, following the ongoing elections to the Bangladesh Parliament. The former party of Gen Zia-ur-Rahman, the Bangladesh Nationalist Party (BNP), is poised to win. A government headed by the Bangladesh Nationalist Party is expected to be less hostile to India than the incumbent government.
India cannot afford to give in to Dhaka’s demand to extradite Sheikh Hasina, but would be keen to mend fences with its neighbour to the southeast, even if the election, from which Sheikh Hasina’s Awami League party has been banned, cannot be called free and fair.
