As Trump Pushes NATO On Defence, India Must Rethink Strategy

US President Donald Trump continued to be the prime mover and shaker of global events. In the midst of ongoing negotiations for a deal to cap Iran’s nuclear programme, following Israel’s decision to scupper the negotiations by pre-emptive bombing of Iran’s air defence capacity, Trump decided to join the Israel-Iran war by ordering B-2 bombers capable of carrying 50,000-pound ordnance and flying 10,000 miles non-stop to drop so-called bunker buster bombs on Iran’s Fordo and Natanz nuclear facilities. This, even as US submarines fired Tomahawk cruise missiles at the third nuclear facility at Isfahan. Iran’s nuclear sites have been obliterated, exulted Trump.

Later, the US defence secretary hedged a bit, saying Iran’s nuke-making capacity has been obliterated.

A more sober battle damage assessment by other arms of the US defence establishment has revealed that Iran’s nuclear facilities have been only damaged, not destroyed, and that no one has any idea where Iran has spirited away the cache of more than 400 kg of uranium it has already refined to more than 60% purity.

In Bad Faith

Unless president Trump or prime Minister Netanyahu of Israel wishes to send in soldiers to ascertain the actual damage to the bombed nuclear facilities and investigate the fate of the refined uranium, there is no way to be sure that Iran’s bomb making days are over. Rather, the attack shows bad faith on the West’s part when it negotiates a deal, and could well convince Iran that the best course is to go ahead and build a nuclear weapon, to build the kind of insurance against attacks that North Korea has created for itself.

Iran has chosen to make a show of attacking Israel and the US base in Iraq, and accept Trump’s offer of a ceasefire between Israel and Iran. It has not closed the Strait of Hormuz, as it initially threatened to, constraining the shipment of oil out of the Persian Gulf and raising the price of oil. Oil prices have hardened, but not quite gone through the roof.

Trump Effect On The US Dollar

Stock markets have been surprisingly resilient, and the US dollar weakened against major currencies, thanks to Trump’s criticism of US Fed chairman Jerome Powell, for the Fed’s continuing hesitation to lower interest rates, on account of anticipated inflationary effects of Trump's tariffs. How lasting the Trump damage to the credibility of the US dollar is an increasing subject of market speculation.

Trump continued to affect the world in other ways. He continues to push his own Big Beautiful budget Bill through Congress, with its expenditure cuts on Medicaid and welfare payments to pay, in part, for tax cuts for the rich, and the prospect of adding $2.4 trillion to the US government debt. This puts downward pressure on the dollar.

India’s Defence Opportunity

Another major Trump effect played out at the NATO summit in the Hague. He has ‘persuaded’ NATO members to commit to raise defence spending to 5% of GDP by 2035, with some grumblers protesting, in return for reaffirming the NATO commitment to the Three Musketeers’ motto, all for one and one for all, contained in Article 5 of the treaty, which obliges the alliance to treat an attack on any member as an attack on the rest as well.

This does not just mean added business for the world’s arms makers. It could mean smaller outlays for welfare and industrial policy subsidies, possibly in tandem with higher taxes, to raise resources to step up defence outlays. Most NATO members fail to meet the existing defence spending commitment of 2% of GDP. The impact of such a resource crunch and re-orientation of domestic tax and spending priorities would not stay limited within the borders of NATO member states.

The European Union is likely to grow even more inflexible on imposing carbon taxes on domestic production and on the carbon border adjustment mechanism (C-BAM) levy on imports, to neutralise the effect of carbon taxes on domestic producers when they confront imports from countries without carbon taxes.

India is the world’s largest importer of defence equipment. The forthcoming European race to rearm itself would push up the prices of all kinds of cutting-edge defence equipment, and India would stare at higher prices. There is no point in buying more handguns, on the grounds that they are more affordable, when you are confronted with rapid-fire machine guns. This, obviously, is a challenge.

Step Up Funding

However, it is also an opportunity. India must step up its indigenous defence production, starting from research and development, design, testing and manufacture. Policy has already evolved to welcome private sector participation, with or without foreign investment, in defence production.

The funding available to startups to take on defence-related R&D and manufacture must be stepped up. Defence production for India’s own needs and the growing export market is a potential source of new dynamism that the Indian economy sorely needs.

In Other News…

After producing a surge in domestic liquidity by cutting the cash reserve ratio by a full percentage point, forcing some banks to park their funds, left high and dry by slow demand for credit, with mutual funds, the central bank, Reserve Bank of India, has decided to mop up liquidity with variable rate repos.

Even as advance tax collections slow, net direct tax collections so far this fiscal have dipped 1.39% below the level of last fiscal. We saw net foreign direct investment inflows slow to a trickle of less than $400 million last year, with outward investment by Indians and divestment and repatriation by foreigners combining to almost equal the gross inflow of foreign direct investment.

India continues to be part of a global trend of dollar millionaires to leave their home countries to take up residence in low-tax jurisdictions. According to a Henley and Partners report, India stands to see a net outflow of 3,500 dollar millionaires in 2025. Combined with the figure for outward FDI of $29 billion last year, and the continued reluctance of private capital to step up investment in manufacturing capacity, this represents less than a rosy endorsement of India’s investment climate.