Modi Takes Aim at Trump’s Threats With Budget to Shield India

The latest outline of India’s plan to live in the new world order dominated by the US president came on Sunday in the annual budget announcement, packed with support for exporters hurt by US tariffs, as well as new support for strategic sectors such as rare earths, semiconductors and critical minerals.

Modi’s spending plan promised new spending on infrastructure and an 18% increase in defense spending; this was a bulwark against challenges posed by bilateral rivals China and Pakistan.

Despite these proposals, the Modi government has largely stuck to its debt targets and kept overall spending in check. While the budget avoided the broad-based tax cuts that characterized last year’s plan, it also steered clear of any new big spending in a year when Modi’s party will face some tough election battles in key states.

“This is the holding operation for the Indian economy this year,” said Ashok Malik, New Delhi-based partner at The Asia Group, a business consultancy firm. “It aims to insulate India while being cautious against global headwinds.”

Stocks fell significantly following the budget announcement; A retreat that investors blamed on a tax increase on stock market transactions to curb speculation rather than general dissatisfaction with the new spending plan. The government also plans to borrow more than the market expects in the next fiscal year, a move expected to weigh on the bond market on Monday.

Setting the tone for her 90-minute budget speech in parliament on Sunday, Finance Minister Nirmala Sitharaman declared that India faces “an external environment where trade and multilateralism are compromised and access to resources and supply chains are disrupted.”

In the face of these threats, he called for India to “maintain its deep integration with global markets, export more and attract stable long-term investment”.

Although not named, the budget was clearly intended to address new challenges created by the Trump administration. The most significant of these is the 50% tariff imposed since August, aimed in part at punishing India for its purchases of Russian oil. Customs duties from India’s largest trading partner have negatively affected labour-intensive sectors such as textiles and furniture.

Modi’s response to this adverse situation was to make the economy crisis-proof by making it more self-sufficient. Last year he cut consumption taxes to boost domestic spending, overhauled labor rules to make it easier for businesses to hire and fire, and opened the nuclear and financial sectors to investors.

“The focus of policy continues to be on improving the efficiency of factors of production, deregulations and sectoral ease of doing business,” said Madhavi Arora, economist at Emkay Global Financial Services Ltd. “The reformist agenda continues.”

Modi’s secondary strategy has been to strengthen trade relations to offset the US threat. Last week, after nearly two decades of negotiations, India and the European Union announced the completion of a free trade agreement that gives exporters on both sides some reprieve from Trump’s tariffs. India also signed trade agreements with the UK and New Zealand last year.

Confidence

Sunday’s budget also introduced new spending to boost semiconductor and pharmaceutical production, as well as new efforts to boost self-reliance in strategic sectors with an initiative aimed at helping mineral-rich eastern and southern states build out the mining, processing and production of rare earth minerals.

Anish Shah, managing director of Mahindra Group, said the initiatives are “forward-looking and essential for a resilient industrial ecosystem that can thrive amidst global uncertainties.”

It is unclear whether the government’s prudent budget will be enough to support growth and create the millions of jobs the economy needs each year for its young population. While the government forecasts growth for the next fiscal year to be between 6.8% and 7.2%, the market consensus is more pessimistic at 6.6%.

Opposition leaders were quick to point out that the government’s spending plan was inadequate and ignored real economic threats such as youth unemployment and low household savings.

The Modi government’s focus for now is on steering the economy through uncertain times, with little room to deviate from fiscal targets.

“This budget was critical,” said Angshuman Bhattacharya, partner at management consultancy EY-Parthenon, because “geopolitical events and their predictability have led to risks to India’s normal growth story.”