Abhijit Bhattacharyya | Donald, Dragon and Dollar: Delhi caught in the middle?

Call it tempest, turbulence, tsunami or whatever you want, the new President of the United States, Donald Trump, has already done it -- by inflicting a sense of fear and uncertainty to torment friends and foes alike. One must give the devil his due. Mr Trump is transparent about his move or means, goals or intentions. He’s on Mission MAGA (“Make America Great Again”), despite the lack of precision or specifics on how to achieve his goals at any or every cost.

Nevertheless, no one can accuse Mr Trump of consistency and psychological coherence and conformity. A few words have got deeply embedded into POTUS’ psyche: “tariff, transaction, trade and territory”.

POTUS announced tariffs on Canada, Mexico and China. But he also immediately stayed his own orders for a month for Ottawa and Mexico City after talking to their leaders. Since China heard nothing from POTUS, instant retaliatory tariffs were imposed on American goods. A tariff-cum-trade war has already begun.

While it is no economic match for either the US or China, the “high” Indian tariffs are also in Mr Trump’s line of fire, as became evident during his meeting with Prime Minister Narendra Modi at the White House last week. Just a day earlier he had announced “retaliatory” tariffs on all countries, and he clearly spelt out that there would be no exceptions. Whatever any country levied on US goods, the US would impose the same “reciprocal” levy on that country’s products. This was the background to the US and India announcing at the Modi-Trump meeting that they would more than double bilateral trade to $500 billion within the next five years. Even before Mr Modi had gone to the US, India had waived US-specific tariffs (specifically imposed six years ago in 2019) in the Union Budget presented on February 1, 2025? But it may not have been enough.

Mr Trump, at his meeting with Mr Modi, spelt out the solution. Buy more American goods, including warplanes like the new F-35 Stealth fighter and other defence equipment, such as the Stryker infantry combat vehicles and Javelin anti-tank missiles, as well as purchasing American oil and gas. The idea is to trim the “huge” $35 billion trade surplus that India currently has with the US.

There is a clear, immense sense of fear across India, especially among the bureaucracy in New Delhi, about Donald Trump, and how to keep him in good humour. This lay behind the Budget appeasement, as the Union finance secretary wryly stated: “We don’t want to give anybody any signal that we would like to be protectionist”. He clarified further about the rapidly depreciating rupee from December 2024, saying: “There’s no concern about the value of the rupee as volatility in the rupee is being managed by the Reserve Bank.”

But why shouldn’t India be protectionist in its self-interest? China zealously and jealously protects its interests through a variety of means. So do all major nations, including the 27-member European Union. Also, why should India not be concerned about the rupee’s falling value? Since India has traditionally been more an importer than an exporter, the falling or depreciating rupee worsens its trade deficit, that permanently damages its currency.

The Indian establishment must brace to face the harsh reality that West-driven concepts like “globalisation”, “liberalisation” and the “world as one village” are now past their sell-by date. The World Trade Organisation is virtually in the ICU, at least for the foreseeable future. Thus, any country with a weak currency and a rickety trade balance cannot play a leading role in the world arena, which is transforming in favour of a strong currency like the US dollar, crushing friends and foes alike. This is why New Delhi is under pressure, given its $35 billion trade surplus with the US, to reduce or even abolish tariffs to keep Mr Trump in good humour. The huge 4.5 million-strong Indian diaspora in the US is another complicating factor.

And then there is China. What began as a modest, manageable trade imbalance at the turn of the last century has turned into a monstrous $100 billion-plus deficit, which along with the weakening rupee has made the import bill too heavy to bear. The finance secretary has aptly said that the rupee is being managed by the RBI, but the central bank too has its limits, and beyond a point can’t constantly intervene in the money markets, as that has its fallout on the country’s foreign currency reserves, which stood at a record $704 billion in September 2024.

India therefore faces a pincer movement from Donald Trump and the Chinese Dragon. It is a $35 billion surplus from the West and a $110 billion deficit from the East. The main culprit is the chronically weak Indian currency. History and economics show that without a stable currency, no nation can progress to its desired level of development. The US is able to dictate terms as the dollar is universally acceptable. This is why Mr Trump had told the Brics nations, including India, not to think about replacing the dollar for trade purposes, otherwise there would be consequences. Other global currencies like the yen, the euro, the pound sterling, etc, are inherently stable, and hence don’t face problems.

After its devastation during the Second World War, Japan owed its spectacular economic recovery and rise to fixing of a “single exchange rate of 360 yen to the dollar” from April 23, 1949. The rate remained constant and fixed (360 yen to one dollar) for 22 years until 1971. Japan emerged an extraordinary export-led growth engine to become one of the top economies of the world.

Can India do a Japan in the 21st century? Not yet, but New Delhi certainly can take a cue from the Tokyo story to stabilise its currency if the present volatility in world trade is to be faced without further damage. The trade system of multilateralism is under serious challenge with the sudden burst of unilateralism by the United States, which has not only put a brake to accepted norms followed by the West but stands to cut China’s 30-year juggernaut and the decade-old Belt and Road Initiative. India has now got into the crossfire with the challenging task of buying more from the US and reducing its imports from China. It will be tough, but is it impossible? It is an uphill road ahead for India and will need a considerable amount of political will.

The writer has served as a chief commissioner of customs in Hyderabad and Delhi