Imagine a world where the global economic order is shifting, and even the United States, once a beacon of unwavering partnership, is now viewed with a degree of skepticism. That's the reality painted by Paul Gruenwald, global chief economist at S&P Global Ratings, following his recent visit to India. He shared his insights with the Times of India, covering everything from the US economy's health to the ripple effects of tariffs and India's impressive growth trajectory.
Let's dive into some key takeaways. Gruenwald addressed concerns about global economic uncertainty, noting a significant shift in the narrative over the past six months. "Back in April, tariffs and downside risks were our main worry. Now, we're seeing potential upside from data centers and a capital expenditure boom," he explained. While policy uncertainty in the US still casts a shadow, the overall macro picture appears brighter than anticipated.
But here's where it gets controversial... Did economists initially overestimate the impact of US tariffs? Gruenwald admits they did, citing three primary reasons. Firstly, the initially announced tariff rates were significantly higher than the final implemented rates. Secondly, there was surprisingly little retaliation from most countries, who largely accepted the tariffs as a cost of doing business with the US. China was the main exception, initially matching US tariffs tit-for-tat. Gruenwald also pointed out the numerous exemptions granted, resulting in a lower effective tariff rate than the statutory rate. While the statutory rate sat at 17%, the actual tariffs collected by the US equate to a 10% effective rate.
And this is the part most people miss... The burden of these tariffs hasn't fallen solely on consumers. Instead, companies, wholesalers, retailers, and importers are absorbing a significant portion through margin compression. While the impact hasn't been as severe as initially feared, it's essentially a tax levied by the US on its own people. Gruenwald estimates that the final incidence will be shared roughly equally between businesses and consumers, although the pass-through has been slower than expected. Furthermore, widespread relocation or re-shoring of manufacturing to the US hasn't materialized.
Turning our attention to India, Gruenwald highlighted its ongoing tariff disputes with the US, alongside Brazil. However, he anticipates a potential agreement soon, which would alleviate the uncertainty. He then made a rather bold statement: "The US is seen as a less reliable partner than it was before." This perception is driving many countries, including India, to diversify their trade and investment exposure, hedging their bets in a more uncertain global landscape. India's relative economic closure offers some insulation, but the broader trend of moving away from the "Washington consensus" is undeniable.
Gruenwald added that many countries are reassessing their international relations and proactively managing their risks. He touched upon how investors view India, emphasizing its position as the fastest-growing major emerging market, suggesting the growth baton has passed from China. India benefits from significant tailwinds and a long runway for sustained growth. Maintaining a growth trajectory of around 6.5% for several years would be a commendable achievement, he stated. He subtly criticized China's growth model, suggesting India could learn from China's over-reliance on capital deepening rather than productivity improvements. He implied that a growth rate of 6% to 7% is something India should be proud of.
What do you think about this shift in global perception of the US? Is it a temporary blip or a sign of a more permanent change in the international order? Do you agree with Gruenwald's assessment of India's economic prospects and the best path for its future growth? Share your thoughts in the comments below!
