Trump Has Reset India and the World for at Least the Next 15 Years
Insights on how India can use a moment of global turbulence to drive structural change
In this episode, author and journalist Puja Mehra speaks to Neelkanth Mishra, Chief Economist at Axis Bank, about the lessons India can draw from past currency wars to navigate the turbulent years ahead. They discuss how, in the decade after the collapse of the Bretton Woods system, countries devalued their currencies to gain trade advantages—and how similar pressures are resurfacing today as major economies look to depreciate their exchange rates. Drawing on global historical patterns, Mishra explains why India’s medium-term balance of payments outlook is relatively stable, but also why access to foreign capital and careful currency calibration will be crucial for sustaining growth.
He argues that the current period of global economic flux is a rare opportunity for India to take difficult but necessary reform decisions—removing barriers for entrepreneurs and farmers, improving access to technology, and building resilience against a more protectionist world order. Without such reforms, sustaining current growth rates could become a challenge.
Tune in for insights on how India can use a moment of global turbulence to drive structural change, sustain economic momentum, and emerge stronger in an era of competitive currency moves.
NOTE: This transcript 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 regarding any feedback, you can drop us a message on [email protected].
—
TRANSCRIPT
Puja Mehra: Neelkanth, thanks for joining the show.
Neelkanth Mishra: Thank you, thank you for having me.
Puja Mehra: So, last we spoke was when President Donald Trump, I think was not yet in office, he had just got elected and we were both quite optimistic. I remember we had discussed that his rhetoric might turn out to be worse than the reality, but at least for me, I'm afraid it has turned out the other way round. I think what he's doing has shocked me quite a bit.
What do you think?
Neelkanth Mishra: Yeah, likewise. What I think we are now seeing is the President trying out, testing out the limits of his executive authority, is breaking apart or at least stopping to disrupt the strategic alliances that the US have been trying to stitch for a long time. Now, you must have seen he started to question economists who are writing stuff which is not in line with his thinking.
He has, of course, disrupted and negotiated deals with universities. He's fired the statistics folks at the Bureau of Labour Statistics. So, I think the number of things that he has attempted to do in testing the limits of institutional control, and so what I find absolutely remarkable is that those checks and balances are not yet showing up, meaning that within the Republican Party or within the Congress, we are now starting to see, I don't know if you saw that, questioning of Scott Besson by a congressman on who will pay the tariffs and he just couldn't give an answer. So, at least some pushback has started. I think that the pushback will intensify as the months roll by.
But so far, I think the disruptive nature and I would say somewhat self-obsessed, well, he was always known to be self-obsessed, but at the expense of the country that he represents, I think that has been quite negatively surprising.
Puja Mehra: Not only internal checks and balances in the US, but also the entire might of the EU, of Japan, Korea, large economies of the world, large trading partners of US. They haven't resisted as much other than China, of course, which is playing a strong hand. We haven't seen internationally also any pushback against President Trump's plans.
But I wanted to focus today, Nilkant, in this conversation with you on, you know, what are the odds for Trump tariffs that have been announced on India's exports currently at 50%, 25% tariffs, which were announced as reciprocal tariffs and 25% penalty for importing a lot of Russian oil. Less than China, but yeah. What are the odds of this getting revised either upwards or downwards, given we know that in another 10 days or so, negotiations between the USTR team and India will resume in India?
Neelkanth Mishra: Yeah, no, as I understand, the negotiations are still ongoing. And there is at least a newspaper headlines talked of the Prime Minister when he goes to the UN General Assembly. If sufficient progress has been made, maybe there will be a summit meeting.
So let's take a step back and see where we are in the big picture. Part of the negotiating tactic, and it tells you how successful at least on negotiations he has been, that in trying to stitch bilateral deals and completely sidestepping the multilateral forums, President has managed to break down the resistance of individual countries, which is why the success with Japan and Korea and Europe. Frankly, some of the commitments made seem more to be just for the headlines.
It is not clear exactly how the $600 billion and the $500 billion of investments that have been promised, they will be tracked, what is the form of that. So those things have not been discussed, but at least the fact that everyone has bent the knee has been quite remarkable. To some extent, that is not surprising, in the sense that all of these countries are dependent on the US for their military support.
So Germany has a US base, Japan has a US base, Korea has a US base. And therefore, I think there is a strategic vulnerability in standing up and upsetting the President. Now, like most politicians, and politicians everywhere are very savvy, smart, you do not get to be the Prime Minister or President of a country unless you are extraordinarily capable of withstanding pressure, trying to time your decisions.
And then coming to the India discussion and bringing it into context, unlike 25 years back, there are many more voices in the India-US relationship now. So just three, four weeks back, even the Trump administration was negotiating and discussing with India on technology and AI alliances. Remember that trade deals, good trade deals are not the only issue in the world.
So there are going to be defence partnerships, however powerful the US may be, it will need allies, it has to choose those allies. In a tactical decision, as it tries to get close to China to at least get a deal signed, which frankly is now obvious to China and to the rest of the world as well, he may be pushing away some of the allies. But eventually, you know, there was a reason why for 25 years, the US was courting Japan and India and Australia and forming the Quad.
Of course, it's now history, but there are other alliances that the US has to respect. There is also the services-related alliance, meaning that while he has deliberately kept services out of this government, partly because he is trying to placate the MAGA crowd, which is mostly interested in manufacturing jobs, but partly also because the US has an upper hand and a better trade balance, and therefore it does not want to mention it. But eventually, that has to become part of the picture.
So the fact that 30 to 40%, if not higher, of employees of US banks are stationed in India, the fact that most tech companies, I mean, Amazon, Google, Meta, they have billions of users in India and they have large development centres in India. These are not issues to be, it's unlikely they're not going to emerge. They will come up.
So if the US administration thinks that the narrow prism of goods trade and that to bilateral negotiations is the only discussion they're going to have with every country, I think they're gravely mistaken and clearly they're not that stupid. So it is just a negotiating tactic that you pick up one issue, and create such a song and dance and create this aura that, oh, I'm a madman, I can do anything, I will break things apart. You stand up to me, I'll give you 100% duty.
I don't care if it hurts me. I don't care if it hurts my strategic intent. So I think it is okay to play that tactic once.
Remember, as someone was writing that, you know, one year back, we were all discussing whether Kamala Harris would be able to win and Mike Walsh was a common man. And here we are one year later, it seems like President Trump has basically no checks and balances. So coming back to the question, I think as the relationship is multilateral, has multiple fronts, it is going to be hard for the US to keep India in the boondocks or at least in the jail, saying that, you know, I'm going to punish you with 50%.
With what face is he going to talk to Prime Minister Modi the next time he has to sort of ask for something? It is not that this country of 1.4 billion people with $250-300 billion of exports and pretty much accounting for a large part of global chip design and global software development can be just brushed aside. That will happen.
And therefore, I think these duties will fall to a more reasonable level. My own sense on why this 50% was done was that I think at 25%, the sense the US side had was there. The two sides had stalled.
Discussions had stalled. And therefore, in order to break the logjam, you sometimes raise the stakes so that at least when the conversation restarts, both sides understand the urgency of getting a decent deal and then you come up with an agreement. So I don't think it is anything beyond that.
And therefore, six months later, I'm reasonably sure the duties are going to be lower, even if there is no Russia-Ukraine peace, meaning that also is on the cards now, right? So meaning you would have seen how Russia expects, even that they've been conquering territory over this last couple of days, that they expect that something meaningful will happen in Alaska on Friday. So even if that does not happen, and it is quite possible because clearly the Ukrainians don't want that deal.
Even then, I think the chances of 50% falling to 25% or somewhat lower is quite high. It is not going to fall to zero or 10%. That is also clear.
That may take two or three years because, see, remember that the tariffs are going to be very harmful to the U.S. consumer. And this is something that, you know, other people have written. Some of them, President Trump once fired.
But clearly, logic says that if there is $500, $600 billion of tariffs they are collecting, the exporters have been working in very efficient markets. So it's not that they were sitting on giant profit pools, which they suddenly can start sharing with the U.S. federal government. In fact, I just read today that of the $3.5, $4 trillion or $3.5 trillion of U.S. imports, about $800, $900 billion is imported by very small firms of less than 500 people. And the tariff burden on them would be $202 billion. So, you know, if it's a giant Walmart or a Target importing stuff, they at least have some bargaining power. You know, if you're an average Joe small firm with 500 people, you are going to be a price taker.
So there is absolutely no way that the $200 billion or whatever they've estimated is the tariff burden will be passed on to the exporter. That is going to be either retained by them, in which case they go bankrupt or will be passed on to the consumer. So as these things start to happen, the fact that everyone was in consensus that tariffs don't work, will start getting proved.
And once it starts getting proved, then it is up to someone finding a respectable way of unwinding them or dialling them down. So eventually that also may happen. But at this stage, I expect the 50% to not last more than a few months.
Puja Mehra: In the interim, what hedge does India have against the Trump tariff plans, whether they remain 50% or even if they change?
Neelkanth Mishra: See, the hedge is, remember that governments are a very small part of the equation. You see, businesses are large. This is a data point which demonstrates, I'll let it to you, what happened in the US-China trade after 2017.
See, the US reports that they imported X from China and Hong Kong. And China and Hong Kong report that they say exported Y to the US. So ideally, X and Y should be the same, if not in the same ballpark.
Till 2017, X was about 40-45 billion dollars higher than Y. So basically, imports are generally booked, including freight and insurance. Exports are generally excluding those.
So there is, therefore, it's not surprising that X, which is the US reported imports Hong Kong was 40-45 billion dollars higher than what China was reporting. In 2018, when the first set of tariffs became effective, the Trump 1.0 tariffs on China, over the next three years, what was plus 40-45 became minus 100, minus 120. So there is almost a $160 billion swing.
And the only logical explanation is that this is a case of under-invoicing and trans-shipping. So China says that they're exporting 100. By the time the import invoicing is happening, that document shows maybe 80 or 70.
In things like apparel, the gap is 45%. So basically, China says I'm exporting 100. The US says it's importing 55.
Ideally, it should be 110-120 because it should include insurance and freight. So now, you really think that if there was a 50% or even a 25% duty on gems and jewellery, that it would keep going from India to the US, it can go to Dubai and then go to the US. If you're doing commodities like chemicals or petrochemicals, various types of metals, the economies that can ship to the US maybe will keep shipping.
Everyone else will ship to other markets. So there will be a period of, I think, three to six months, maybe in one year, where people find other sources. And those will start getting absorbed.
So I think the business people are used to uncertainty. I think it is terrible. It's a terrible situation for them.
But they are far more resilient than what some of the newspaper headlines would suggest. And I do think that many such sidesteps will be created.
Puja Mehra: But Neelkanth, that will in fact work in Trump's favour, no? Inflation will not go up because the higher tariffs won't apply because of this redistribution of sourcing. And you will say, look, the deficits have dropped because the deficits will rearrange themselves amongst different countries.
Neelkanth Mishra: Well, I don't think that it works that way. So for example, look at this China-US thing. There is now academic research, it's been long enough for academicians to have studied it, that the prices of washing machines went up.
Prices of dryers did not go up because washing machines were subject to the tariffs in Trump 1.0 against China, and dryers were not. So there's academic research which proves that. And the fact that you are importing the same amount, it is just that you are showing lower value of invoice because you want to pay lower duties.
You're just saying that it came via Panama or West Indies or whatever, just so that China tariffs don't apply. But you still have to pay. So as you know, every country has a balance of payment statement.
So you kind of document how many dollars did you get in, how many dollars you went out. Because there are timing issues in various things that feed into that statement, there is a line called errors and omissions. In errors and omissions, generally they should even out over time.
For example, you may have imported $100 billion, you may have had some trade credit, so you didn't have to pay for it the same quarter, you paid for the next quarter. And so those things, of course, over a period of time adjust. With China, errors and omissions in the US are remarkably constant at $400 billion.
So what has happened is that you have under-invoiced imports, trans-shipped imports, and therefore you have to pay for that. And so why is it that errors and omissions with China are like $400 billion? So there's clearly a lot more happening which doesn't meet the eye.
And remember that the voter who is finally what any political leader lies on, feels the real economy. See, forget about the statistics and the rhetoric. It is finally the real economy that matters, right?
So if these hundreds of thousands of firms which are small importers and add up to $800, $900 billion of US imports and are going to be paying about one-third of the extra tariffs the US is going to collect, guess what? I mean, I don't think they have the ability to absorb it. So I think they are going to pass it along and prices will go up.
So whether jewellery trade is shrinking or not, finally, it's not very important in the sense that the US reported numbers, it seems that imports from China have fallen. But the fact is that the value-add that is coming from China in US imports at US consumption remains very high. And I think that the macroeconomic impact of that, I think will still be fed.
So transshipment, in fact, it actually weakens the state that you are actually losing on revenue. You are encouraging illegal behaviour, which again, the way the president seems to be going, he doesn't seem to have a problem with that, doing illegal things and cutting side deals and all that. But the point is that in the economy, if there is a negative impact, it will show up in one form or the other.
And frankly, we are not here to decide on what the US politics will be. I mean, so the bigger question for us is how big and how bad will the impact be on India? I think at 50%, I think it will be substantially negative in the short term.
But I think the impact overall, I mean, we are not a very good exports-driven economy. So when we're thinking about Indian prospects, I worry a lot more about the pace of monetary transmission of what the RBI is doing than in how long 50% tariffs stay.
Puja Mehra: But the politics in India will also come into play. If there is a loss of export competitiveness in labour-intensive industries like textiles, et cetera, millions of jobs, at least 2 million jobs will be affected if not lost.
Neelkanth Mishra: That is correct. See, but one of the reasons that trade balances are very hard to shift very quickly is that you can't build those supplies that fast. So while we may think that apparel is semi-skilled or ready-made garments, making them as a semi-skilled job.
I mean, suppose that you have 2 million people and all of them, all the 2 million, I think that number will be much smaller. People directly get affected, but still a large enough number. But what I'm saying is, even if it is, say, half a million people, unless you're saying that that will be replaced by machines, in which case they would have been done by machine anyway already, you have to find those half million people somewhere.
So if the argument is that those half million people are available in Vietnam, all that through the mess that Bangladesh is today, some buyer is able to go and get those things stitched there, or as some of the Trump team members say, that he will start doing all the last mile screwing on nuts and bolts also in phones in the US. I have a friend who is a very senior person in a robotics company. He was saying, you know, we keep saying that we have to manufacture in the US, but it's a US company.
So he says, where are the workers? Point is that it's not going to be easy. It's not easy for the importers either.
So the fact that the newspaper headlines are saying that those guys are pressuring the Indian suppliers or we can't order right now, but they can't have empty shelves on Christmas, so they have to find something. And at very short notice, finding that scale of supplies, billions of dollars, no one is sitting in that kind of spare capacity. So they will also be willing to say, oh, you know what, why don't you just move it to Nepal or just move it to Singapore or to Dubai and we will take it from there.
So this is exactly what when the first Russian sanctions were happening. This is kind of what happened with, for example, the tea exports. So you lose maybe 1%, 5% of the business, but it's never as big as what the headlines say.
Puja Mehra: Yeah, I don't think production capacity and labour supply can overnight be sort of put up in other countries, especially if they're not as large as India is. But still, over a period of time, do you think manufacturing value chains are going to see a change? Also because all of a sudden, geopolitics seems to have become very important and that is determining so much.
How is that going to play out?
Neelkanth Mishra: So that is, I think, the policy error that we get into because we start letting the newspaper headlines and a few people's ability to dominate those headlines on a daily basis start influencing our thought process. So this is a simple thought experiment that I would like to place in front of you. One is that we would take a $4 trillion economy today.
At some point, if you are bullish, it could be 15 years. If you're bearish, it could be 30 years. We would be a $20 trillion economy.
Now, if you're a $20 trillion economy, you added $16 trillion of extra GDP at 20 minus 4. It's reasonable to expect that not more than $1 trillion of that extra $16 trillion will come from a change in net exports. And let me tell you why I'm saying so.
China today, which is the largest manufacturer the world has ever seen in terms of global share of manufacturing, today, in a $19 trillion economy, their goods trade surplus is about, last year was $1 trillion. It's currently analysing about $1.2 trillion. Now, if a country that size is also unable to export that much, meaning they're exporting $3.5 trillion, but remember that the percentage of value-add in most of the exports is actually quite small. 30%, 35% is the max because these are all global value chains. So even if you say, I don't know why penalise them for gold imports or oil imports, we take that out. So it becomes 1.4, 1.5. But it is because China is so dominant that we are seeing some of these disruptive forces emerge. So it's very unlikely that India will be as dominant and as disruptive as China has been. So as we think about going from $4 trillion to $20 trillion, we have to be very clear that not more than $1 trillion will come from exports. So $15 trillion has to come from domestic demand.
And when I was in my previous firm, 2018-19, we had done this study where we talked to 100 global firms where we combined revenues of $1 trillion and we had surveyed them as to, this was about the China plus one, how fast it was moving. So we asked them, okay, so how much do you manufacture in China? And why do you manufacture in China?
More than two thirds, I would say 75%, 80%, actually three-fourths of them said that we manufacture in China for China. So even this robotics company, my friend, who he's actually setting up a facility in China, as we speak, to manufacture for China, because the China demand for robotics is the biggest in the world now. So as we think about growing our economy, we have to remember that the channel through which exports help is competitiveness.
It is through productivity. If you can export, means that you are the best in the world and therefore you can provide the cheapest possible nuts and bolts and toys and apparel and the best quality. So that's the channel through which exports help.
So being in an open economy, it makes you more efficient or it forces you to be more efficient. As regards end demand, we have to rely on domestic end demand. So I don't think that we should be overly worried about, see, if the exports to the US were an option, and I think they still will be, because these strategic shifts cannot be just broken apart with a hammer by three, four months of bad behaviour, even if they would not come through.
If you take, for example, say $450 billion of goods exports, suppose in seven, eight years' time, they were to reach $1 trillion. Given that the value-add percentage is not going to be more than 30%, we are talking about three or 4% addition that would happen in seven, eight years. So maybe there's a half a percent shortfall, but if we are able to compensate that by dealing with Europe better, opening up those trade routes, it is quite possible to offset some of those.
Not to say there is zero impact, but it's not the end of the world. And remember that India's great success has so far been on services, that even through this slowdown in IT services, we are still seeing a sharp increase in the setup of global capability centres. We are also starting to see remittance income improving, that as plumbers in Germany, and farmers in Italy, and nurses in the UK.
So as the demographic transition there, there creates an opening for getting formalised immigration, which is not going to permanently change or drive demographic change, and therefore is much more socially acceptable. Those opportunities still exist. So I think the global opportunity, and remember that a very large part of the market is actually Asia.
So in the things that we do well in, there is Africa, of course, where China is making deep inroads. And these are again areas in the markets that we should be tapping as we develop new solutions. So finally, while it is in everyone's interest that the India-US trade relationship depends, if it was to so happen that India's goods exports to the US are not growing anymore, it's not that India cannot sustain a 7% growth rate.
Puja Mehra: So it's very interesting what you're saying. Economists such as you have the conviction that economics will sort of drive sense because people feel it in their everyday living. But the politician has also reacted to something when we are seeing these disruptive decisions being taken.
Tariffs are a tool for it. What the US feels predates President Trump and may even outlast him. Trumpism may outlast President Trump's term.
We are seeing some bit of these political forces and concerns in Europe as well. So the tariffs may go away if the economic impact begins to bite voters the way you have described in the short term or medium term. But this tension between the politics and economics may stay.
Are you still then hopeful of... Because it's not just about what is India's ability to export or dependence on exports. India's economy is dependent on exports.
But it is after all a global world. We also depend on the outside world for capital. And if other than efficiency or returns, capital is going to move around the world on the basis of deals such as President Trump is signing with Europe or Japan.
If those trends begin to take off, are you going to be concerned?
Neelkanth Mishra: It's a great question and I think it has to be a multi-part answer. So first, there's absolutely no disagreement with what you're saying that there are deep-rooted problems in the world today. And there are deep-rooted problems in the U.S. today. Trump's election is a manifestation of the voters' angst against those problems. So when I speak about these things, I say grand objectives, no grand strategy. Meaning that there is a problem of inequality.
That the non-high school crowd in the U.S., their life expectancy has actually dropped in the last 35 years. The inequality has worsened meaningfully. There are some people who are now throwing some recent data and saying that it's starting to narrow.
But anyway, but at least from 1990 to 2020, at least that trend was very clear. There is clearly a problem of the dollar being massively overvalued and the U.S. has a massive fiscal problem. Or in fact, that the U.S. feels that if it was to get into a hot war, it will not be able to fight the Chinese because it doesn't have any manufacturing. So it can't build ships. I mean, it can build ships, it's not building enough ships. It'll struggle to have the manufacturing for say even basic things like penicillin.
And therefore, it's very worrying. So those concerns, I think perfectly valid. All I'm saying is that tariffs and the way they've been imposed are not the side solution.
And therefore, the limited point that if something doesn't work, it will very quickly get discarded. And I'll give you an example of something that happened about 90 years back in the U.S. So when Franklin Roosevelt was elected in 1932, when he took power, even he was sworn in, he was inaugurated in 1933, March. The banking system was shut.
I mean, it was the middle of the Great Depression and his team didn't know what to do. So they actually went to the Hoover administration's team and said, you know what? You guys have thought about this problem.
Why don't we work together? And over the next week, they somehow got the banks to open. Long story, but very interesting.
But the point I'm making is that one of the key promises of FDR was that he would get agricultural commodity prices to rise. They had fallen by 60 to 80 percent from 1919 to 1932. And he said that I'll get him back to the 1926 levels.
Because 1919 was the end of the Great War. So therefore, that was artificially high. 1926 is a good level.
How do you get there? So you've made this promise. So like Mr. Trump made this promise that I'll get manufacturing jobs back in the U.S. and make the U.S. a manufacturing powerhouse. Objective is great. I think that is perfectly understandable. How do you get there?
Now, of course, they had no idea. So he relied on this agricultural economist who had studied corn prices and cotton prices over the last 200 years. And he said, you know, whenever gold supply goes up, commodity prices go up.
So the U.S. administration started buying global gold. And there was this ridiculous period where FDR would set the global gold price at the price at which the U.S. was buying from his bed every morning. There's an incident I read where he said, oh, I will raise it by 21 cents.
And someone said, why? He said, oh, it's seven into three. The point is, they kept trying it till the time it didn't work.
So initially, again, you know, because the U.S. president was saying it, the commodity market started to push up prices. But several months later, because fundamentally nothing had changed, the prices started falling again. So guess what happened to that economist?
His opinion was no longer sought. So he used to travel from New York to Washington every month to give advice to FDR. He used to make nice charts. He suddenly became shunted out.
And then a stronger decision was taken. This took about a year. Now, the U.S. administration is, again, I think, going to discover that if this doesn't work, see, finally, they are politicians. The power you must have seen in the only time, well, other than China hardballing him, the only other time I've seen the president really flinch is during the Iran-Israel war, where the MAGA crowd was dead against American involvement. He's a politician. He's relying on the popular support.
So if the popular support starts dipping because he's made, see, remember that a number of people voted for him because they just didn't like the other side. And they were worried about inflation, that Biden wasn't doing enough, whether he was or not, I'm not getting into. But those were the concerns.
And if that concern is reemerging, see, they've not elected Trump to do this drama about humiliating everyone and pushing away allies and strategic allies just for tactical purposes. They've sent him there to solve a problem. And some of the political drama of harassing Harvard University and Columbia University perhaps does placate some of the hard-right crowd, but I'm not sure that that is sufficient.
So as we go forward, see, remember that the next 15, 20 years are going to be a period of great turbulence. The US will want to devalue its dollar. The real effective exchange rate of the dollar is where it was in 1971 and 1985.
And after both those episodes, it crashed by 30, 35%. The Chinese real effective exchange rate is down 18% in the last three years because their inflation is nearly zero and they're continuing to invest in new capacities. So their inflation will be zero.
So remember that if the USD, CNY or the CNY INR are unchanged every year and our inflation is 4%, every year the Chinese manufacturer is getting 4% more efficient. So how do you counter that? And should you counter that?
I think those are very important questions. So that's a big problem. I think the issue of the US fiscal being completely out of control is another huge question.
So the fact that the next 15, 20 years will be very turbulent and with significant realignment of global rules and the rules for engagement is also very obvious. I remember that the US, as Stephen Kotkin put it, US is 5% of world population, 25% of GDP, but 50% of global defence spending. I mean, how is that sustainable?
So the fact that the popular crowd in the US does not want it to be engaged or involved in peacekeeping efforts or militarily involved elsewhere. So all of those things will mean that new alignments, all these battles that are skirmishes that are emerging, all of those will become more common. So it will be a much more turbulent world.
What I'm saying is that when it comes to India's own economic path, we have to stay focused on all the opportunities that exist within India. I mean, we don't have to be dependent on anyone for making sure that the average Indian does not live in 100 square feet of constructed space, but say 300 square feet of constructed space. And the construction for that is all livestone, this, that, I mean, all that is inside.
Iron ore, it's all inside. If you want to give metro rail or buses, highways, all of that is internal. So India is blessed with very fertile soil, great weather all around, large population.
It would have been ideal if the global growth was conducive. If it was a more open world, I think those votes we have to give up. The point I was making is that tariffs will not solve the problems that the US is trying to solve.
Puja Mehra: Sure, yeah, tariffs will not solve the problems they're trying to solve. Politicians probably will not come up with the solutions that are required for these problems. And it may take, you're saying, 15 to 20 years for them to realise that they have to listen to the economists all over again.
But you said some very interesting things about the dollar, about how the world will not be as open and therefore India may become more inward looking or may have to, may be forced to become more inward looking. And also from what you're saying, can India carry on being ambiguously non-aligned, you know, the way we've been, we call it strategically non-aligned. How are these things going to play out in the next 10, 15 years that you're saying?
Neelkanth Mishra: Yeah, so when I said India needs to rely on internal demand, I mean, I didn't say inward focus. I mean, it's not that we put up trade barriers. I think that we need to allow more foreign competition.
We need to open up our markets, make them more efficient. For example, if say, even on something like agriculture, where cotton yields are 2x, 3x that of India abroad. Frankly, when I read about how Iran is supplying fruits and vegetables to all of the UAE and through greenhouses, imagine what some amount of investment, see we are 12% of global arable area.
We have massive amounts of rainfall, very conducive weather. Most tracts of India can, farming tracts can do two crops, even three crops a year. And we are undershooting.
So there are many things that we need to do, open up so that our productivity goes up. So inward looking is, all I was saying was that we may have to rely a lot more on domestic demand than say the Asian tigers that we rely on. But we have to be open.
Otherwise, you know, the productivity improvement doesn't happen. On what tactics India may have to apply, is that the question?
Puja Mehra: Yes, one, we may have to do some sort of ideological and policy realignment, but also on the dollar, what you said on the dollar, both things.
Neelkanth Mishra: You see, if there was any doubt that being allied with one full power is more productive, you know, in the last couple of weeks, I think those doubts have been put to rest, right? So it's very clear now. Frankly, while sitting in India, we have this habit of getting, feeling more insulted.
But it's not that President Trump is singling India out. So the Taiwan president has been told on an official visit, don't come to Washington, don't come to New York. The Koreans are upset.
The Japanese are upset. Of course, the European, the NATO president, NATO Secretary General, I don't know why he did so, but messaged the Big Daddy message and it was publicly tweeted. So Kais Tharmar is picking up stuff that Trump had dropped.
So I think that those kind of humiliations are being dispensed to everyone. It is not just India. And therefore, the fact that even the US is not really interested in being the policeman of the world, at least till the time it has sorted out its own problems, is a reality.
And so therefore, you have to kind of fend for yourself and therefore have multiple alliances. And this is what diplomats call the absence of binaries, right? That no country will be a permanent friend or a permanent enemy.
And therefore, you have to be absolutely pragmatic in terms of dealing with various nations. So take China, for example. So people swing between absolute animosity or the other extreme.
China has so much cheap capital, a lot of technology and shortage of labour. Why can't we partner with them? See, the truth will be somewhere in the middle.
And the parallel I give is, if you take China and Japan, if we are still upset about the 1962 war, think about all the things that China and Japan have been through from the time even before that. Of course, before that, China was a dominant power, but after the major restoration, they've had some humiliating wars for China, where the Japanese business people in Shanghai were actually acting as spies for the Japanese army. And so you can imagine the distrust the Chinese would have against Japanese businesses.
Then there was, of course, the rape of Nanjing and all the atrocities of the Second World War. Through the Japanese prime ministers visiting the Yasukuni Shrine to just needle the Chinese politicians and, of course, get them more support locally, then in response, China throwing missiles into the Sea of Japan. The trade between China and Japan has gone from $1 billion in 1970 to $400 billion in 2020.
Before COVID, there were 20,000 people flying between China and Japan every day. So as we think about uplifting our country, growing our economy, I think we have to be absolutely pragmatic about what we need, our people need, and then accordingly choose our friends and enemies. So I think appreciating that it is going to be a multipolar world order now because the Americans aren't even pretending to be interested in being the one pole.
So if there's no just one pole, then you have to engage with everyone. So that is going to happen. Now on the dollar itself, see, the reason why the dollar could fall as much as it did after 1971 and 1985 was that the only relevant economies, large economies in the world at that time were Germany and Japan.
And on both places, as I mentioned earlier, the U.S. has armed bases. So it wasn't much of a negotiation. If the dollar has to fall now, who does it fall against?
Because the Japanese have had such a terrible experience after the Plaza Accord that they're not going to willingly accept it. The Europeans, the number of people are now saying the only recourse they have is to let the Euro weaken. But Euro weaken against whom?
And the Chinese are, of course, they're ineffective exchanger, keep dropping. So it becomes, I would say a 1930s like scenario where successively countries were breaking the peg to gold. So there is no such peg today, but there was competitive devaluation.
So part of the reason that in 1945, in the Bretton Woods Agreement, everyone accepted pegged exchange rates. They had a terrible experience with countries devaluing their currencies repeatedly and causing massive volatility and churn in the global currency markets. In fact, again, we use the same FDR example.
So Hoover had accepted a global conference on currency and finance in London in June of 1933. Of course, FDR honoured that because the U.S. had committed to it. And Raymond Morley was his speechwriter slash confidant slash advisor who represented him.
So he effectively accepted that the French and the British wanted pegged exchange rates. Let's say exchange rate stability, even at that time. That these competitive devaluations were hurting everyone.
And Raymond Morley apparently accepted that and he thought that FDR would be supporting him. But at the last minute, FDR switched his stance. So he was still in the U.S. Of course, Raymond Morley was in London. And the reason was America first. He felt that if he pegged the exchange rates at that time, the flexibility he would have in pushing up corn prices would be constrained. So throughout that decade, countries were busy devaluing their currencies and finding mechanisms to do that.
So that's going to be the scenario, I think, in the next couple of years. Till the time that hopefully without a war, some agreement is reached on what the best mechanism is going to be. But till then, the fact that our balance of payments remains a bit stretched in the near term.
I think in the medium term, we are quite balanced. Our current account deficit is nowhere as close to as large as it used to be. We are not as dependent on foreign capital just for stability of the currency.
Of course, to grow faster, we need a lot more capital. What may actually happen is that as countries try to devalue their currencies, they may be forced to send capital out. So remember that what China is doing is allowing more Chinese to buy foreign assets because their trade surplus is not going to fall.
Not going to fall is maybe too strong a statement. It's unlikely to fall because they still have overcapacity. They're still building capacity in heavy machinery and equipment like ships and cars and heavy machinery.
They're still investing and exporting and dominating the world. So their trade surplus may remain quite wide. In which case, then there would be a pressure on the RMB to appreciate.
So to counter that, they're opening up, so allowing more capital to go out. So an environment where most currencies, most economies are wanting their currencies to depreciate, I think access to capital should become slightly less of an issue. So if you can provide reasonable returns, which I think India can given the amount of growth that we can deliver, I think access to capital will be slightly less of an issue.
But yeah, but we have to be very careful in calibrating to the right basket and not letting the currency appreciate too much whenever that happens.
Puja Mehra: So just to sum up last question, there isn't any need for us to in any way recalibrate our assessment of India's growth trajectory or even policy frameworks for developing. With minor tweaks, we'll manage.
Neelkanth Mishra: Not minor tweaks. I think it is times like these when tough decisions are easier to take. And see, remember that any economic decision, even if it is massively positive for the collective, it ends up hurting someone.
And that's the reason why we don't want to take them. That's why it's easier to block decisions than to take new ones, right? So it's times like these when we need to take a hard look at ourselves, see this as an opportunity to reform, unlock a lot of the barriers, hurdles we've placed on entrepreneurs, on farmers, and allow them access to better technology.
And so if you use this in the right way, then clearly the fact that the world is more turbulent or is going to be more turbulent or the world markets may not be as open as they used to be when China was growing, will become less of an issue. But it will require us to work very hard. Otherwise, I think sustaining these growth rates will be a challenge.
But the picture I wanted to paint was that there are solutions available. I mean, this is not like, you know, the fact that Shroff was throwing a tantrum is not the end of the world.
Puja Mehra: Great. On an optimistic note, let me say thanks to you.
Neelkanth Mishra: Thank you. Thank you, Puja.
