There will be short-term hiccups

Just as we were about to close the issue, focussing on markets, the Pahalgam massacre took place.

The government quickly responded, blaming Pakistan and the ISI within the army, which acts almost independently. In addition, the government took steps to cancel visas, close the border crossings, suspend all trade and downgrade the Pakistan embassy – asking half the staff to leave. Pakistan followed suit and also closed Pakistani airspace to Indian aircraft heading to Europe and the Middle East.

But in addition, the government took the unexpected step of suspending the Indus Waters treaty that had held through all earlier wars. Given that the Indus is the lifeline for millions in Pakistan’s Punjab and Sindh, the Pakistan government warned that any interference in water flows would be an act of war.

The mass media is full of calls for ‘revenge’. And the Modi government is bound to take some unexpected further steps. As it is, for several years now, there has been a ‘virtual Berlin Wall’ between the countries. And any action by both governments will strengthen and reinforce this wall for several years more. In this heated environment, it is difficult to work out an ideal long-term policy. But in the short term both sides are bound to suffer – with Pakistan coming out worse. But as Prime Minister Vajpayee had pointed out, countries can choose their friends but not their neighbours!

In all this, the markets get temporarily impacted. But this year, the bigger uncertainty has been caused by President Trump, upsetting trade and markets with his tariffs and flipflops. While the Indian markets, like all other markets, also fell initially, the markets have started recovering from the initial shock.

The reality is that exports are 21-22 per cent of our GDP. And of that only 18 per cent are destined for the US. And in any case some sort of deal will be worked out with the US which will limit the impact of tariffs. More so if we take denser imports into account which trade figures omit. But of course, some important sectors, which are labour intensive too, like garments, can be hurt badly. But overall, it will not impact our growth in any significant way. But the US and the value of the dollar are important in other ways. To start with, a big portion of our reserves are held in US treasuries. Also, US institutions have historically been big foreign investors in the markets. So, while the markets have started their recovery, there will be short-term hiccups along the way.

The one good thing that has come out of Trump’s tariffs is that our government has learnt to act quickly on trade deals. The FTAs with the UK and particularly Europe have been in talks for decades. They are expected to be finalised by the end of the year. And the US deal even before that!