By Ira Dugal
This was originally published in the India File newsletter, which is issued every Tuesday. Sign up here to get latest news from India and how it matters to the world.
Investors in India are on edge ahead of the annual federal budget scheduled for release on Saturday. In a Trump-driven twist, however, global pressures may figure prominently in a policy process that had been expected to zero in on India’s slowing domestic economy. That’s our focus this week.
Don’t miss this comprehensive Reuters poll on what economists expect from the budget.
And OpenAI faces a legal battle from Indian publishers. Scroll down for more on that.
This Week In Asia
** DeepSeek sparks AI stock selloff; Nvidia posts record market-cap loss
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** CIA now says COVID-19 ‘more likely’ to have come from lab
** South Korea President Yoon indicted for insurrection over martial law decree
** Flights halted for Afghans approved for special US visas, advocate and official say
Modi’s Budget And Trump’s Priorities
India’s annual budget is typically the year’s main economic policy event, and more so this year as Prime Minister Narendra Modi’s government presents the first full budget of its third term – and sets its economic playbook for the years to come.
But this year’s budget may get an added twist as U.S. President Donald Trump’s priorities elbow their way into the process, putting tariffs and corporate taxes on the agenda alongside the pressing need to jump-start domestic growth.
India’s weak domestic consumption, and the resulting pressure on private-sector investment, are forcing the government to consider tax cuts and a slowdown in the pace of fiscal consolidation, while focusing on job creation.
At the same time, it will now have to contend with Trump’s demands on correcting trade imbalances and drawing more manufacturing to U.S. shores.
In a call with Modi on Monday, Trump emphasised the need to move towards a fair bilateral trading relationship. The two leaders plan to meet next month when Modi visits the U.S, Trump said.
Economists expect the budget will unveil tariff reforms and consider a concessionary tax rate for new manufacturing facilities in India, both of which would address emerging global challenges but could have mixed implications for the domestic economy.
Lower tariffs, for example, could hurt protected industries, but cut costs for manufacturers that use imported inputs. Low corporate taxes could limit room for funding programmes to boost consumption, but encourage investment in manufacturing.
Early last year, Modi’s team mapped out reforms to boost the manufacturing sector, critical to creating jobs in the world’s most populous country. In line with those objectives, Finance Minister Nirmala Sitharaman promised in a July 2024 budget speech to conduct a comprehensive review of import tariffs, aiming to promote “ease of trade”.
Citi economists said in a report last week that this exercise, which is expected to recommend steps including tariff reductions in the budget, will be crucial in the current global environment.
In particular, it may aim to encourage domestic manufacturing, Citi said, by correcting “inverted duty structures” that assess steeper tariffs on components and other inputs to manufacturing than on the final manufactured goods themselves.
The review may also look to reduce import tariffs on certain goods from the U.S., from farm products to LNG and military equipment, to preempt the threat of higher retaliatory tariffs, Reuters reported last month.
On the other hand, it may increase tariffs on Chinese commodities like steel, which have flooded markets worldwide and are facing higher tariffs in the U.S.
Another decision likely to be taken with an eye on U.S. policies is some sort of corporate tax relief.
With U.S. President Donald Trump promising lower corporate taxes in the U.S., economists expect India and other markets will in turn be pressured to keep corporate taxes low, lest the U.S. undercut them in attracting global manufacturers.
India lowered its corporate tax rate sharply in 2019 to 22% from 30%, in the hope of spurring investment, although analysts say it has mainly just boosted corporate profit margins without spurring new investments or jobs.
Still, the government may look to bring back a concessionary tax scheme for new manufacturing facilities that ended in March 2024 as a way “to boost domestic manufacturing and attract global value chains to India”, Nomura economists said in their pre-budget note.
How should the budget balance both local and global risks? Write to me with your views at ira.dugal@thomsonreuters.com.
Quote Of The Week
“The disproportionate power of tech companies in prioritising content and extracting advertising revenue has raised concerns among publishers.”
A lawsuit filed against OpenAI by India’s Digital News Publishers Association, which includes the Indian Express, the Hindustan Times, and digital news units of Indian billionaires Gautam Adani and Mukesh Ambani, alleges improper use of copyrighted content.
OpenAI’s conduct constitutes “a clear and present danger to the valuable copyrights” of the association’s members as well as other outlets, it said.
Asked for comment, OpenAI reiterated a previous statement that it was engaged in constructive partnerships with many news organisations, including in India, and was using publicly available data in a manner protected by fair use principles to build its AI models.
Read details about the case in this report by Reuters reporters Aditya Kalra, Arpan Chaturvedi and Praveen Paramasivam.
Market Matters
India’s benchmark bond yields fell sharply this week after the central bank stepped in to ease liquidity conditions in the banking sector.
In a package of measures announced on Monday, the Reserve Bank of India said it would buy bonds, offer medium-term funds via repo auctions and conduct forex swaps.
Traders see the move as a precursor to a cut in interest rates in February, when the central bank’s rate panel meets for its next review.
“The measures are a signal to the market that inflation worries are behind us and that the RBI could begin easing monetary policy,” said Ritesh Bhusari, joint general manager for treasury at South Indian Bank.
(By Ira Dugal; Editing by Edmund Klamann)
