By Invitation. US elections: Why you should care

History will be made soon after one of the most contentious US Presidential elections. While Hillary Clinton could be the first woman US President, Donald Trump could be the first President without any previous political or military experience. Having lagged in the race for a significant period, Trump has been cutting into Clinton’s lead after the reopening of investigations by the FBI into Clinton’s emails. Meanwhile, history professor Allan J Litchman, famed for correctly predicting the winner of every US presidential election since 1984, has continued to favour a Trump win.

Democrat Clinton is likely to follow almost similar policies as compared to the current administration while Trump promises radical changes. While Trump will focus on significant tax cuts, calculations by independent agencies indicate that the US economy debt is likely to soar much higher under Trump than Clinton over the next decade.

However, Trump’s plans would push consumption as income taxes come down. Investment demand could rise and this is expected to provide a growth push to the US economy, raise wages and employment.

This is not the case with Clinton’s plans as marginal tax rates on individuals and businesses rise. The negative bias from Trump’s policy wish-list is his protectionist approach and the anti-trade proposals. He plans to raise tariffs on Mexico and China by 35 per cent and 45 per cent respectively, and brand China as a currency manipulator. Clinton is more open to free trade so long as it does not hurt the interests of domestic business, manufacturing and US workers.

The results of the US presidential polls are likely to have implications for the financial markets, not only globally but also for emerging market economies including India’s.

In the event of Trump’s win, it could lead to larger market volatility as there could be a phase of uncertainty in policy direction. Trump has been vocal about the fact that Fed Chairman Janet Yellen sides with politics and has not been tightening monetary policy. Trump’s leadership could see a more hawkish Fed, and hence a stronger dollar. Emerging market currencies, including the Indian rupee can be expected to weaken when dollar strengthens.

The hawkish stance from the Fed is also likely to imply a steeper US yield curve. It could also at least in the near term prevent any further monetary policy softening in the emerging markets space. Thus, the Indian rupee can be expected to depreciate if Trump wins while the RBI might be more willing to push out any further softening of the repo rate, warranted out of the recent dips in inflation. On the other hand, Clinton’s win could mean business as usual.

India’s macro perspectives are unlikely to be significantly altered with the US elections. India is perceived to be a growth powerhouse at this point in time — with the boost coming into the consumption story from the 7th Pay Commission awards and a good monsoon.

The domestic politics scenario has also favoured a transformation of the structural impediments in the economy, leading to India climbing the “Ease of Doing Business” ladder. In the current context, it becomes difficult for any economy to ignore India. India’s growth, on the other hand, will mostly be led by domestic factors while external factors can impact only marginally.

While broad-based implications can be limited, there could be some issue-based ramifications. From this perspective, Clinton is a known person to India — she had been the first lady for eight years, US Senator for eight years and the secretary of state for another four.

She has mostly been a friend of India and, if elected, could provide a lift to the bilateral relationships between the two countries. On the other hand Trump could pose some uncertainties.

Further, Trump has been extremely critical of the H1B visa and says that it has hampered employment possibilities of Americans by outsourcing jobs to professionals from India and other countries. Thus, a Trump win can cause some worry for Indian workers, including the IT sector.

There is a view that Trump due to his stand against China could shift the balance of economic power to India. We note that if this is followed to its logical conclusion, it would be at a very inappropriate moment for China and the Chinese economy could see a huge downward bias to growth. This in itself has the potential to generate shocks through the financial markets in Emerging Asia, including India.

Would China’s loss of exports to the US be India’s gain? Unlikely, as India may not be geared to deliver similar quality products as those of China to the US. On the other hand, the risk is that China could be searching for markets to dump their excess produce – thereby potentially flooding the Indian economy with their products. With just a couple of days left for the result – only time will tell.

The writer is Chief Economist, IDFC Bank

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