Rhetoric vs Reality: Trump’s Disruptive Agenda with Neelkanth Mishra
How do we differentiate between the rhetoric and the reality when it comes to Donald Trump's Agenda?
In this conversation, journalist Puja Mehra speaks to Neelkanth Mishra, Chief Economist at Axis Bank. They explore the global economic ripple effects of Donald Trump’s fiscal and trade policies and what they mean for India, inflationary pressures, shifts in global capital flows, the “China shock” impacting trade and manufacturing. They also discuss Elon Musk’s geopolitical role, US-India trade dynamics, and how India can adapt. Tune in for insights into the challenges and opportunities for India in a rapidly changing global economic landscape.
ABOUT NEELKANTH MISHRA
Neelkanth Mishra is Chief Economist, Axis Bank. He is also the Head of Global Research and a Whole Time Director of Axis Capital. Prior to Axis bank, he was Co-Head of Asia Pacific Strategy and the India Strategist at Credit Suisse. He is a part-time member of the Indian Prime Minister’s Economic Advisory Council as well as part-time Chairman of UIDAI (Aadhaar) and a part-time member of the Telecom Regulatory Authority of India (TRAI). He has also advised government bodies like the India Semiconductor Mission and the 15th & 16th Finance Commission.
NOTE: This transcript contains is done by a machine. Human eyes have gone through the script but there might still be errors in some of the text, so please refer to the audio in case you need to clarify any part. If you want to get in touch regards any feedback, you can drop us a message on [email protected].
---
INTERVIEW TRANSCRIPT
Puja Mehra: Neelkanth, we want to talk to you today about Donald Trump's election and his economic policies, which, especially for trade, are expected to be quite disruptive, even if it is early to say how disruptive. I wanted to understand from you how hawkish he can be for India. We do know that it's China that is likely to be the main target of his hostile policies.
But when he was president last time, he did call India the tariff king. And he also stripped our GSP concessions. So, how difficult do you think this presidency is going to be for India?
Neelkanth Mishra: Okay. So, trade tariffs means only one dimension of uncertainty, and we'll explore that. There are many other ways in which the Trump presidency is likely to change the status quo.
The most important, in my view, is the global cost of capital. As per some estimates, the increase in federal debt in the US if Trump's stated policies are implemented would be close to $7.8 trillion in the next 10 years. Now, that means that debt would be nearly 20% higher than what it is currently expected to be, which is already quite high.
So, this is going to raise the yields on the US treasuries, which are the risk-free rate for financial assets or valuing financial assets in the rest of the world. And some of the emerging market outflows that we have been seeing in the last two months are because the US 10-year yield has gone up from 3.6 to 4.4. And if the Trump fiscal policies were to push that up even further, we could see capital outflows. And that would mean that some of the capital formation in India that was happening because of foreign inflows, and it is already more than 1% of GDP slower than it used to be 10-15 years back, we could actually see further pressures there.
So, that I think is the biggest channel of stress. Frankly, if you think about the reciprocal tariffs, so coming back to the tariffs question, one of the things that he has proposed recently is that he will have reciprocal tariffs. So, if you have X% tariffs against my products, I will have 5% tariffs against your products, or the same X% tariffs against your product.
So, when you have something like that happening, I mean, at broad level, this means about a $6-7 billion loss for India, but that's really, really high level. And we are making a lot of assumptions about when those will be effective, what the second order effects will be. Remember that tariffs and trade, or other trade, is like water.
I mean, if you have a certain advantage on the manufacturing side, these advantages will stay with you. So, if there are higher tariffs in the US, you export somewhere else. And from there, the product then flows into the US, especially because it's not really going to go after India in a very direct way.
Trying to close the indirect routes is going to be very hard. But even if there was a 100% impact of say reciprocal tariffs, the impact is not going to be that big for India. Frankly, on the good side, we are not very badly exposed.
PM: So, from what I understand, you're saying that the channel of transmission of the so-called Trump shock is not going to be the real economy, it's more likely to be in the financial markets and the capital markets. But when we read the Western media, the impression I get is that, oh my God, all hell is going to break loose, that there's going to be mass deportations, there's going to be a global trade war, there's going to be a lot of chaos, we don't know what tomorrow is going to be like. Do you think those fears are slightly overdone, or we really are in a phase of uncertainty?
NM: See, the media wants to sell clicks, sell stories. So, I think there is temptation to exaggerate. And I think for the politicians who want this fear to be felt, I think they're supportive of that.
And I don't think Trump and his team are unhappy that this kind of fear exists. But remember that we are talking about very large ecosystems, we are talking about large vested interests. So, think about the deportation number, right?
So, the maximum number of deportations that the US has done was under Obama, not under the previous Trump administration, but under the Obama administration, and it was 0.5 million a year. There's a certain capacity at which you can sort of identify illegal immigrants, incarcerate them or detain them, and then create deportation channels and then deport them. It is not, it is logistically a very hard thing to do.
Secondly, if you do in an economy with, say, 200 million workers, if you would suddenly deport 11 million workers, that's going to create significant damage to the economy. You know, it is very unlikely that the ecosystem in the US will permit that scale of deportation. So, we should assume that the illegal immigration should slow down because of this new regime, because it's going to be much harsher on illegal immigrants than perhaps the previous regime was.
But I think deportation is going to be much more difficult. Having said all of that, that there are real world constraints that, remember that this is a country where the state is always, its impact is always kept in check, because the state is unfettered and remarkably powerful on international affairs. But on domestic affairs, the state's influence is deliberately kept in check.
That's their gold standard and that's the constitutional structure that they're used to. So, the level of disruption may be a lot lower, but remember that this time he is selecting people who have sworn loyalty to him. So, as many others have said as well, that in the first term, perhaps he was surprised that he got elected and therefore he wasn't ready with the team.
And therefore, when he was selecting people, he ended up selecting some people who said that, no, my loyalty is to the flag, to the constitution, my loyalty is not to you. In this case, I think he's selecting people who have sworn loyalty to him. So, his ability to push through things will be better than it was last time.
At the same time, his team has been working on some of these regulations, going through what can be potentially stopped by the Supreme Court, what can be potentially stopped by the two houses of the legislature. And therefore, the chances of a slew of policies starting on 28th January, which may actually sail through, those chances are very high. I expect that there will be significant uncertainty, particularly on the financial market side.
But I mean, it's not that, you know, things are really going to break apart immediately. If something has to happen, I think we'll see second, third order effects over the next two, three years, but it may not be immediate. What I worry about is the second, third order effects rather than the first order effects, in the sense that if he does go and if he manages to step out of Ukraine, for example, and the peace deal is seen as giving concessions to Russia, then there could be serious challenges or chain reaction that emerge in terms of how Europe responds to it and what other regions respond to, you know, the US first backing Ukraine and then pulling off. So those, of course, we should keep an eye and ear open because there can be second, third order effects which are quite disruptive.
But in the first order, I don't expect the region, the world to sort of fall apart on the agenda.
PM: So like you're saying, the people he's selecting are going to be key factor in determining how much of his agenda, at least the agenda that he has articulated, he's going to be able to push. And he has said that he's going to change the way Washington operates. But what do you think is in his mind?
You know, there is one, you know, there is a performance and then, you know, there is what he really actually wants to do. And like you say, here in India, it's important for us to keep in mind that the US structure, the way the state operates in the economy, it's not going to become like as intrusive as probably it is in other places. But what do you think is on his mind?
Because that is going to be probably one big thing that drives his policies.
NM: See, what is on his mind will also evolve. So it is unfair to expect that he is seeing very clearly exactly how the US governance structure will shape up. So for example, if the US federal government spends six and a half trillion dollars a year, whether the DOJ leadership believes they will be able to cut two trillion dollars a year from that or not is, I think, highly questionable.
Even if that was to happen over the time period over which that can happen is, I think, highly questionable. Given that only about $110 billion or so is the wage bill, to say that I will slash the number of employees and bring down the budget spending, these are all, I think, overly simplistic assessments. But I think the broad objective that he has is that there has been excessive regulation.
That in many sectors, like say energy, like in financial services, there is excessive regulation. We need to bring it down. So that, I think, is one.
Second is that there is a clear dissonance or other that the US, the average US citizen is no longer as willing to fund foreign wars as they used to be. And remember that all of this goes through in cycles. If you read about what started to happen in the early 1930s, there was a similar disenchantment that, look, we need to sort out our own internal problems first.
We'll forget or we'll worry about what happens when the US walks away from the gold standard later. We need to have the Smoot-Hawley tariffs, the Glass-Steagall Act. We need to break away from the gold standard.
So the fact that all these foreign wars are unsustainable and that the US citizen does not want to be participating in them is another thing that is very clear about. The fact that they are in strategic competition with China is something that is very clear about. But how exactly that manifests itself into actions and policies and how the world will change.
Remember that if you just blindly put, say, 60% tariffs on something and the opposing economy is really among the leaders in those sectors, what you are doing is you are making those products and services way more expensive for your own economy. And the impact on investment activity within your own economy may be seen with a lag. In fact, like what we saw in the steel tariffs, that beyond a point, the steel industry also doesn't know whether because, you know, if they're really unviable, why will they be wanting to add more capacity?
So what it just does is it pushes up steel prices in the US and that's not very good for anyone. So as the policies from a high-picture, intentional level start translating into what is realistic and how is the opposing party going to respond, I think, you know, we will see changes. And in fact, what China is also doing from what we read is that they realise that once the I slapped you, you slapped me starts, it's going to be very hard to stop.
And therefore, let's start to engage well before the first salvos in the tariff war are fired. So they would want to engage. So it is quite possible that they start giving concessions and the 60% becomes 15% or 20%.
It becomes much more finely tuned than overall 60% import duty and all that. So therefore, I suspect that even he or his own team do not fully comprehend or have a very clear picture in their mind on what they want the economy to be like. But I think the broad direction of travel, of spending less on foreign wars, on trying to make sure that energy costs are lower, that immigration is less of an issue, law and order improves, all of those are, I think, the broad directions in which you want to take a break on.
PM: And it's probably important for India, also from what you're saying, to keep an eye on inflation. Most of what he has said is said to be not good news for inflation. And he has backed down from something he said earlier about changing Federal Reserve Chairperson.
Does any of that concern you? Is that something to be watched from India?
NM: You see, inflation expectations have gone up. So they've gone up about, I think, 35 basis points. So there's a market implied inflation expectations you can track.
There are inefficiencies in that model, meaning some of the tips don't trade that, they're not very liquid securities. So one shouldn't over-interpret that. But there is an increase in inflation expectation that has come about.
Some of it is, I think, just because the US economy has turned out to be a lot more resilient than was expected in September. But going forward, our estimate is that if the 10-year increase in debt is going to be, say, $3.5, $3.6 trillion and not 7.8, as headline numbers will suggest. But because bond yields will go up, I think, that'll also become a constraining factor.
They will not be able to raise the deficits that much. So even if that happens, this means a 10% increase in prices over 10 years, which is like a 1% increase in annual inflation over 10 years, which is substantial. If the tariffs are as imposed, then there's another 2.5% increase in prices. If you spread it over 10 years, that's like a 20-25 point. So the inflation expectations can rise substantially. And the interest rates can go up.
When that happens, while the interest rate going up is a negative for US 10-year bond yields and debt sustainability in the US, in the near term, what this will mean is that the global capital flows start moving towards the US. And that will be negative for almost everyone else. And remember that many of the things that he's proposing are also very good for US equity.
So starting with the very basic fact that the extension of corporate tax cuts, of course, boost profits. But more importantly, if you break down any economy into three major components, there's the government, there's the corporate sector, and there are the households. This is how generally even GDP is reported, including in India.
Now, if one large entity, which is the government, becomes a dissaver or increases its dissaver, then it either increases the current account deficit, or it helps one of the two parts, because then they benefit from it. And it seems, given the nature of the policies, that a lot of this will benefit the corporates. And therefore, it is even better.
So if the profit pool, the profit to GDP in the US is going to be higher because of the fiscal policies that the federal government is going to adopt, then it is better to be in US equities than inside. And which means that US equities, which are already like nearly two-thirds of global market cap, will remain attractive for the global economy. The third thing is that if he really goes about, and on this, I think we have to take him credibly, he really goes about breaking apart some of the fetters and making some of the sectors more efficient, then their productivity should go up.
If he's able to bring down cost of energy in the US, then the productivity does go up. So all of these factors, not just that the cost of capital, the risk-free rate goes up because of his fiscal policies, rather inflationary expectations, in addition to the fact that the US assets, the financial assets, other than bonds, are going to be way more attractive because their profit expectation should be better, means that even more of the capital goes up. So that's the channel I worry most about as we think about the next variations.
PM: And there's also the factor of Elon Musk, his great buddy, who you know wants to sell cars, his Tesla's, EVs in India, but there's no common ground as yet between what the terms on which he wants this market access and what India is willing to offer, has already offered. He had said he would visit India, but then instead of coming here, he suddenly was seen in China. How much do you think a factor Elon Musk is going to be in terms of India-US policies?
Can he leverage his relationship with Trump to get sweeter terms from India or in any way influence the bilateral relations?
NM: I don't think it's going to be that straightforward. Remember that every institution, every government has, I wouldn't call it in a very negative sense, a deep state, in the sense that there are people who understand how geopolitics is done. There are people who will have a say if he's on a state visit and there is a certain protocol that has to be followed.
There's a certain set of people who will be part of the meetings.
PM: The institutional checks and balances.
NM: The checks and balances will exist. But at the same time, you know, there have been stories in the first term that Jared Kushner was sort of signing up real estate deals going in the same delegation as Trump himself. So it is quite possible that Musk becomes part of that.
But it is up to India to engage formally. And I don't think Trump will be a party while knowing his actions. I mean, it's very hard to predict what he'll do.
But if it is seen as Musk benefiting directly, I'm not sure Donald Trump is going to sort of let that pass. Because he's seeing, he's bringing Musk in to serve a certain bigger purpose in the country. And I think it's going to be unlikely that in the negotiation between the US and India, you know, whether India allows Tesla or not becomes a very major factor.
That I don't think should be the case and I think should be dealt with on merit. I'm reasonably sure that it will not come into the picture. Because remember that one of the things that people are now talking about is Musk has a very big presence in China.
And he's actually also dependent on the China market. Because of the full sail drive and some of the technology developments that his company has been a leader in, the Chinese want Musk to be around. And therefore, you know, how exactly those like his personal interests and his role in the government and to intermingle is going to be complicated.
But I frankly don't think that in the US India relationship, something as minor as what Tesla should be doing should be a part.
PM: Since you bring up China, so the other shock that we keep hearing of is the China shock, the excess capacity and lack of consumption in the Chinese economy. How will that interact with everything that Donald Trump is being sort of talking about? How do those two forces interact?
NM: Let's take a step back on China. So China, a very large part of their growth in the last 15-20 years was driven by urban infrastructure and real estate. Now, the fact is that beyond a point is not so much more than urban infrastructure that can be built without usage going up and all that.
And real estate clearly, I think they've understood it has overbuilt. This has created certain imbalances. So for example, pension assets in China as a percentage of GDP are among the lowest in the world.
They're much below even that of India, despite having a population which is 12 years older. The median age is 12 years higher in China than it is in India. And yet pension assets that represent GDP are smaller than India.
The savings have been locked up in real estate. So if you're a 50-year-old or a 55-year-old and you're about to sort of retire in 5-10 years, so you don't have that much of pension assets, but you do have two houses or one house. Now, the worry is because this whole cycle is turning down and the population is shrinking and at least the real estate cycle, I think the sales are down by 50-60%.
The decline in real estate prices seems to have slowed a bit in the last couple of months because of all the monetary and fiscal measures that have been taken. But it is very unlikely that that will drive a lot of new investment and also provide comfort to people who are actually sitting on houses as their retirement savings. And therefore, domestic consumption is going to be very challenging.
There are other theories. There's a book called Invisible China, which talks about a very large part of the Chinese economy, which cannot really upskill itself. You know, high school enrolment rates in China till 20 years back were only 46%, 25 years back.
And so a large number of people who were very capable or who were moved into industry and they did low-end manufacturing are actually incapable of moving on to the services economy and they're not trained to do that. And so there is a very large segment of the population which is actually getting left behind and they're kind of not even capable of upskilling and participating in the new economy. So consumption in China is likely to remain a concern for a while.
Recently, because they have given these stimulus measures that you can upgrade your car, you can upgrade your AC, upgrade your fridge, there's some recycling happening. But beyond that, I think it's going to be very challenging. So China, when they started moving credit away from real estate into industrial capacity, loans to industry were growing at 5, 7, 8% for nearly a decade, quite a while.
And then around the time that real estate lending slowed down, of course, overall credit growth had to be maintained. So they pushed it up to industry. So industry credit started to expand at 25-30% a year.
Over the last 3-4 months, what we are noticing is that even there now there is no demand for credit because people keep talking about how export growth is so important. It is. In China, in the last 5 years, nearly 40-50% of incremental GDP has actually come from growth in net exports.
But the world cannot take any more. And therefore, even high-quality solar panel manufacturers, high-quality battery manufacturers, high-quality electric vehicle manufacturers, they're all struggling with profitability and generating operating cash flow. So there is so much overcapacity in those sectors that even they cannot add capacity.
So overall credit growth is actually slowing down because now real estate cannot take any more credit and industry does not want any more credit even though it is made available. So therefore, China's biggest challenge right now is deflation. If you look at their CPI excluding pork and vegetables, they're already in deflation.
And the one thing about pork and vegetables prices like vegetable prices in India is that they tend to be very volatile. Their soya and corn imports are rising very sharply, which means that in 6 months, pork supply will improve and then pork prices will come down as well. So they are struggling with handling deflation.
Now, in this current environment, it's going to be very difficult for them to slow down exports because domestic demand is not there. The local governments can't build a lot of infrastructure. The real estate cycle is down.
So what do they do? This is, of course, far more detrimental to say the Europeans, where Volkswagen is shutting down factories and there are several serious challenges emerging, I think in Southeast Asia, in Latin America, and India. I think the counterfactual is where the problem is, meaning that because you were never that good at capital intensive manufacturing anyway, it does not affect us directly.
But it is definitely shutting the door, certain avenues of growth that we could have relied on because of this incredibly low cost of manufacturing and the incredibly low prices that China is selling. And this is all coming out of systematic financial repression. So in China, the system is that in a very large set of people don't have options.
They don't have property rights. Outside the urban areas, there are no property rights. And you have very few avenues for saving.
All of that goes into fixed deposits. The state gets a lot of low cost capital. The state is very asset rich.
People are asset poor. The assets that they held, real estate, is no longer that valuable. So the state can keep financing this and keep bearing losses on this.
But this repression means that a lot of growth avenues in other markets are getting closed. So this is something that, again, we need to be wary of. This will create different types of stresses.
It is already creating stresses in some parts of the Indian economy. And I think it's going to create a lot of distaste for Chinese exports in the rest of the world as well. Everyone is raising import barriers.
This China shock is, I think, a serious one as well. And given the trends in the last two, three months, I mean, I think it's almost as if, you know, as they say in Hindi, Aab Aal Boodhe Mar, that, you know, the trade surpluses are rising in China because domestic demand is weak and they keep exporting. And it's almost like it's waving a red flag in front of an oncoming bull.
So this increases the chances of tariff action.
PM: And that then further has implications for the rest of the world, if it does become a full-blown trade war.
NM: That is the risk. And the more you think about 1930s, the more you start to see parallels. If things are as economists would like you to see, you know, everyone is efficient at doing a few things and they keep exchanging goods and services.
If the Chinese market is closed and the Chinese keep exporting, I think, you know, everyone's starting to draw barriers, becomes a challenge. And the moment that starts happening, productivity growth starts to slow. What will also happen is that trade channels will change.
So if the U.S. does impose 60% import duties, that would be ill-advised. But even if they do, then it is quite possible that, you know, the rebadging starts. Then the U.S. is doing whack-a-mole saying, oh, you know, Vietnam, why are you rebadging stuff from China? Or Mexico, why are you rebadging stuff from China? China itself has already reoriented. So U.S. used to be 21, 22% of their goods exports. Now it's 13, 14%. You know, so they will reorient something else. To some other countries, the global trade flows will start changing, the flow of containers, the flow of ships, which port they go to.
And that creates more disruption, freight costs go up. So yeah, all in all, this can create quite a bit of disruption. And particularly if the tariffs imposed are very high, and there will be a lead time, so the run-up to that will mean that actually the reverse happens, that people try to import stuff in advance of those tariffs going up.
And that creates another round of disruption and volatility. So some sense is that looking at the trade data, it looks like there was a surge in imports from China and the U.S. even before the elections. So perhaps some part of the trade is done, but those kinds of disruptions are going to add to the uncertainty.
PM: On the whole, you're saying that we have to watch out for the financial markets, capital markets, generally, the real economy, there are likely to be constraints on how much chaos there will be, because there will be institutional checks and balances, there will also be probably a reassessment on part of Trump and his teams. I think I read half the labour on U.S. farms does not have legal status, and such a large number of people, details cannot be processed for deportations. But still, we are looking at a scenario where inflation is going to probably trend upwards.
NM: The impact of immigration on inflation is, see, the shortage or the deportation or the lack of immigration will, I think, be a growth factor. I think it is less of an inflationary factor, meaning that, look, all of these immigrants also are consumers. So if you remove the supply of labour and you're also removing demand, all in all, the net impact will be on growth.
The inflationary impact, I think, will be higher from the fiscal channel as well as the trade channel.
PM: Right. And just your last comment, just sort of summarise what it will mean for India, how we should prepare to cope different parts in the economy, the government, markets, maybe exporters.
NM: So the first is that we need to keep the domestic macroeconomic indicators stable. So what we are seeing is that with the income transfer schemes now being run by 14 states, with the elections apparently supporting the impact of these on voting behaviour and turnout among women, it looks like most states will do it. And as that happens, I think food inflation could remain higher.
So when you see 20 to 40 percent increase in the consumption capability of the bottom 20-30 percent of the population, which is being targeted by these schemes, the first thing they do, and very likely so, is eat food. And so potatoes, onions, tomatoes, milk, meat. I mean, I was hearing that from some villages, goats are no longer being pushed out.
So the goats are getting consumed in the village itself. The demand has gone up so much. So as this happens, we need to see how we can increase supply.
The reason why potatoes and onions and tomatoes are so inflexible on the supply side is because the market structures are broken. We need to make sure that as this demand goes up, which is a good thing, that the economy is ready to produce less of rice, which is getting rotting in the warehouses, and producing more of potatoes and tomatoes. And when that happens, if we are able to bring the food inflation down, the RBI can cut rates, the MPC can cut rates, we can see the normal cyclical trend start to play out.
We need to be extra careful, allow more volatility in our financial markets. So our rupee is among the most stable currency in the world, which is a great thing. But sometimes when everything else is being so volatile, if you keep it too little, or the volatility too constrained, it actually starts to build stress points.
So we need to be aware that this volatility is not a short-term volatility, that this could last a while. And it is important to let some of these financial indicators find their own levels. But most importantly, with the competition for foreign capital will intensify, because as I said, the US financial assets are going to look apparently more attractive in the next year or two, partly because the US 10-year yields would have gone up, partly because more profits are being transferred to US corporates.
There is expectation that they will be unfettered and they can grow faster, which means that you need to look even more shiny and attractive. And what that means is reforms, the discipline on the macroeconomic side at the central government level needs to be even more locked up.
PM: Right. Thanks. Thank you so much.
NM: Thank you, Puja. Thank you for having me.
