How Trump 2.0 Could Impact India’s FDI Growth? Insights from SBI Report

As the possibility of a second term for Donald Trump, or “Trump 2.0,” looms in the United States, a recent report from the State Bank of India (SBI) sheds light on potential impacts this could have on India’s foreign direct investment (FDI) landscape. The report examines the economic implications of Trump’s past and possible future policies, suggesting both challenges and opportunities for India as global capital flows shift.

Trump 1.0 and FDI Slowdown in India

During Trump’s first term, aggressive measures were implemented to bring US multinational corporations’ investments back home. These policies, which included sweeping regulatory changes and incentives for companies to reinvest in the US, caused a notable reduction in foreign investment inflows globally. In India, FDI inflows slowed considerably during this period, dropping to around $11 billion as companies pivoted away from international expansion to focus on the US market.

According to the SBI report, “Trump 1.0 policies impacted FDI worldwide, including India, as American companies were encouraged to repatriate capital.” A second Trump administration could see similar policy actions, potentially redirecting investments that emerging markets like India depend on for growth.

India’s New Approach to FDI: Emerging Sectors in Focus

Despite potential headwinds, the SBI report highlights India’s efforts to diversify its sources of FDI as a possible buffer against shifts in global investment patterns. Unlike a decade ago, when most foreign investments were concentrated in traditional sectors, India is now seeing significant inflows in emerging fields, such as renewable energy, sea transport, medical devices, and surgical appliances. In 2024, these emerging sectors are projected to make up more than 50% of India’s total FDI inflows, compared to only 18.7% in 2021.

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Sector	2021 FDI Share	2024 Projected FDI Share
Traditional Industries	81.3%	49%
Emerging Industries	18.7%	51%

Key Sectors Set for Growth Under Trump 2.0

India stands to benefit from global shifts in supply chains, especially in sectors where it has a competitive edge over China. The SBI report points to pharmaceuticals, textiles, and electronics as areas where India could gain a larger share of global investments if the US imposes further tariffs on Chinese products.

“In recent years, India’s iron and steel exports to the US have surged, even amidst trade tensions, rising by 44.7% between FY20 and FY21,” notes the report. Such resilience could position India well to attract new FDI as supply chain realignments continue.

Risks: Tariffs, Dollar Strength, and the H-1B Policy

While opportunities exist, Trump 2.0 policies may introduce certain risks. These include higher tariffs, stricter H-1B visa regulations, and a stronger US dollar, each of which could affect India’s trade and investment environment. An appreciating dollar, for instance, could lead to capital outflows from India as investors pivot to dollar-based assets, and it could raise the cost of imports, particularly for essential commodities like oil. This increase in import costs might add inflationary pressures in India.

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However, a stronger dollar could also lead to a weaker rupee, making Indian exports more competitive globally. As the report points out, this could benefit India’s textile and manufacturing industries, which would become more attractive to foreign buyers.

India’s Resilience and Future Strategy

The SBI report suggests that, despite these potential challenges, India’s diversified investment sources, large consumer base, and growing digital economy provide resilience against FDI volatility.

Government-backed initiatives like Make in India and Digital India are expected to drive continued interest in sectors less affected by trade policies, such as renewable energy, digital services, and advanced manufacturing.

Conclusion

As the possibility of Trump 2.0 approaches, India will be closely monitoring US policy shifts to adapt its trade and investment strategies accordingly. SBI’s report underscores that while a second Trump administration may bring challenges, it also opens doors for India to capitalize on its growing industries, reinforcing its status as a top FDI destination amidst a changing global economy.

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