Steel industry braces to meet fallout of Trump’s tariff war

US President Donald Trump has imposed a massive 25 per cent import tariff on steel and aluminium that will hit India hard. It is the eighth country among the leading exporters of these commodities to the US, having sent out $4 billion in 2023. Now, India will have to immediately undertake trade diversification and identify new export strategies.

As a result of this pressure on export earnings, the rupee which has already been grappling with the uncertainties will be under greater pressure. Over the last few years, the rupee has already been depreciating and global investors have been pulling out of emerging economies, including India. In response, the central bank has been putting more dollars in the market to counter the pressure.

Fortunately, the RBI has been able to manage because of the high level of the country's reserves which still remain above $600 billion. But for how long can this go on?

The Indian steel industry, in particular, is likely to face the consequences foremost as it is a large player and relies on key domestic raw materials like coal and iron. This comes at the head of what has been taking place over the last 12 months when domestic prices have dampened as a result of aggressive imports into India. India started out on the journey on modern industrialisation with the steel industry which was conceived by Jamshedji Tata who set up a steel plant.

Where do we go from here? In the short run, countries across the world will have to wait and watch till President Trump sees reason. Tariff is a weapon which cuts both ways. Higher imports will be a boon for the domestic industry as it will be able to charge higher prices because of costly imports. But the US consumers will end up paying more, raising price levels across the board. Over time, the global competitiveness of US firms will be affected as it will get to live in a market of costlier prices. Eventually, US voters have to decide if Trump will be good for them or not.

The Indian authorities have only a couple of options to play around with. Foremost, it will have to engage with the US authorities so as to try and soften the impact of tariffs, pointing out that India is now a key strategic partner and deserves a special treatment. In particular, India will have to argue that it needs to get stronger in order to tackle the challenge posed by China which will get into its own act in order to fight the turmoil that Trump has plunged this world into.

As the new RBI Governor Sanjay Malhotra has made clear, India is not immune to the global storms brewing on the horizon. Geopolitical tensions, emerging new trade protection, erratic commodity prices and unpredictable financial markets are seriously affecting the overall economic outlook. The global scenario could negate the good work sought to be done on the domestic front. India is not insulated from rising global risks which could disrupt financial stability. So, a big job is yet to be done. The Indian economy must brace for shocks that are sure to lie ahead.

Fortunately, this has come at a time when the authorities were already set on a forward looking path. The Reserve Bank of India (RBI) created wide attention by cutting the repo rate, the rate at which it lends to banks, by 25 basis points (that is a quarter of a percentage) to 6.5 per cent. As the central bank has changed the key rate for the first time in five years, economists and analysts are seeking to figure out what this can lead to.

This rate cut will make money cheaper by lowering interest rates across the board and give a fillip to the economy. But even as the economy grows faster, there is also a chance that with more money around, the inflation rate will also go up. In fact, the economic growth rate has been lately going down, hence the desire to up it a little. The economy is currently expected to grow at about just a little over 6 per cent after having reached 8 per cent a couple of years ago, making India the fastest growing large economy in the world.

But as the economy heats up a little, what will it do to the inflation rate? There is a bit of good news there too. The authorities expect the monsoon to behave itself well, causing the consumer price index to come down in the coming financial year (2025-26) to 4.2 per cent from the higher level of likely 4.8 per cent in the current year (2024-25). That places it well within the RBI's own range of 4 per cent, plus-minus 2 per cent.

An important consequence of the rate cut will be interest rates across the board likely going down with banks taking the cue from the RBI signal. An important aspect will be home borrowers having to pay a lower installment with the interest component coming down. This should put a little more into the consumers' hands. If we add this to the cut in income tax rates delivered by the budget, this is likely to end up raising consumption expenditure for the middle class, translating into better demand for business. Firms should go on raising investment to raise capacity to meet the growing demand.

Rising consumption by the middle class should make the economy look up overall. Fortunately, the rate cut should help the downside of the setback on steel and aluminium exports. Lower exports should make domestic prices cheaper. But the cheaper money should help domestic industry to go in for investment to raise capacity.

In the present situation, more steel and aluminium available cheaply will match with cheaper money from the rate cut. As a result, inflation will be low. Plus, there is a chance that the growth rate will pick up. The blow that Trump administered may well be taken care of by the rate cut.