Make in India, Broken Incentives

JANUS VIEW

As Global Tariff Wars Intensify, India Must Try To Fix Its Flawed Incentives

The week in review was dominated by US president Donald Trump, as every week has been since his inauguration on January 20. In his latest move, the US president suspended his reciprocal tariffs on all countries, save China, on imports from which the tariff has been raised to 125%. Stocks have rallied around the world, but US government bonds have not shared the joy, after uncharacteristically joining stocks on their way down. Normally, when stocks crash, bonds go up, acting as safe haven assets. The erratic behaviour on the part of bonds is reportedly a major factor in persuading the US President to hold the tariffs he had announced on April 2 on hold for 90 days.

Markets hate uncertainty. The tariffs do not bite today, but their jaws remain open, and economic well-being could do down their maw, three months hence. No major decision on investment — on near-shoring, friend-shoring, Just-In-Case reconfigurations of the supply chain — can be taken without clarity on what tariffs would be in place for how long on which country. This would not be known after three months, either, unless the tariffs are withdrawn entirely.

Trade Wars Intensify

If some tariffs remain, the prospect opens up of their removal in whole or in part sooner or later or never. Only those with insane levels of appetite for risk would carry out significant investments in lines of production for which tariffs matter. Most people do not have such an appetite. Trump has ruined the investment climate in the US and hurt export-oriented investment around the world.

The trade row with China has intensified. Chinese tariffs on US goods stand at 84%, and Trump has raised US tariffs on China to 125%. If, how and when these two rivals would negotiate a ceasefire and bring the rates down remains to be seen. This leaves a huge pall of uncertainty and the prospect of an increase in prices of the ordinary consumer goods that fill American shopping shelves intact.

In any case, the base tariff of 10% that Trump announced remains. This would make for an added layer of cost for American producers and consumers. The inflationary effect of just this layer of tariffs would take time to work its way through the system. Unless the economy shows serious signs of tanking, the US central bank, the Fed, is unlikely to be in a hurry to cut rates, especially with the dollar index weakening.

That is not unwelcome in India, where the Reserve Bank of India (RBI) has brought down the policy rate by a second instalment of 25 basis points, to bring it down to 6%. 

Incentives (Not)

The government has announced a policy of incentives for the local manufacture of electronic components. While India has been exporting smartphones in large numbers, all the bits and pieces that make up their innards have first to be imported, leaving the value added in India pretty small. The component indigenisation policy seeks to address this.

India has a terrible reputation when it comes to incentive design. The turnover threshold for small-scale businesses had long discouraged small firms from growing big — at least formally. The present set of incentives are linked to turnover. However, they are also linked to employment. Now, the manufacture of electronic components tends to be capital-intensive. The exponential growth in both the sophistication of artificial intelligence and the deployment of AI in the production process makes the headcount in electronics manufacture pretty variable.

Linking incentives to headcount is ready-made sand waiting to mess up the gears of the incentive mechanism. The safe-harbour provision for transfer pricing for Global Capability Centres is pegged to Rs 300 crore, leaving GCC operators wondering what was the point of such a safe harbour announced in the Budget this year.

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CORE NUMBER

Rs 10.05 lakh crore

This is the total credit extended under Kisan Credit Card (KCC) accounts as of December 2024, up from Rs 9.38 lakh crore in March 2022, according to Mint. While the overall amount of agricultural credit has grown, the share of unpaid or overdue loans under KCCs has actually declined. For instance, non-performing assets (NPAs) at scheduled commercial banks fell to 14.16% as of December 2024, compared to 15.1% as of March 2022. Regional rural banks and cooperative banks reported NPA dropping to 7.1% and 6.5%, respectively during the same timeline. In comparison, NPAs on private bank credit cards surged 28.4% to Rs 6,742 crore in CY24. 

— 🚗🚗 Record Sales for Tata Motors’ Luxury Cars! Jaguar Land Rover (JLR) India posted its highest ever sales since 2008, when it began business in the country. The company recorded a 40% growth rate in sales compared to last year, according to a Forbes article. The luxury car market performed well overall, including JLR’s German competitors Mercedes-Benz and BMW. India’s potential free trade deal with the US could negatively impact Tata Motors, JLR’s parent company, since it is planning to expand into manufacturing electric vehicles too.

— 🇬🇧🇮🇳 UK-India Trade Pact? Ah, So Close! British officials told The Guardian that the UK and India are 90% close to a free trade agreement, according to an Economic Times report. The two countries have been discussing this deal since early 2022, and say they’ve yet to finalise tariffs on whisky, cars, and pharmaceuticals. Another point of contention is the UK’s forthcoming carbon border adjustment mechanism (CBAM), a carbon tax that India finds unfair because it’s a developing country. If the deal passes, the UK would pay a lot less in duty to India on its scotch and luxury vehicle exports, and would be the country’s most significant win since Brexit.

—🔌 EV Chargers Up, But Use? Audi India has expanded its charging station infrastructure, adding over 6,500 EV charging points nationwide, The Economic Times reported. With 75% offering DC fast charging and 16 new partners onboard, the company’s claimed ‘phase-2’ rollout targets highways, urban centres, and commercial hubs. But despite the optics, the on-ground picture remains uneven. As The Core reported, India still has just one public charger for every 135 EVs—far below the global norm of 1:6 to 1:20. Experts say high setup costs, low utilisation, and unclear returns continue to stall real-world infrastructure growth.

—🏢 India’s Office Market Breaks Records. Even as global office markets face a slowdown marked by falling rents and cautious leasing, India recorded its highest-ever office leasing in 2024—70.7 million sq ft, up 16% year-on-year, Business Standard reported. In contrast to cities like New York, Shanghai, and Hong Kong which saw rental declines, Indian cities posted steady growth, with rents rising 3.8–8.2% in 2024. Analysts attribute this to strong demand from IT firms and Global Capability Centres, as well as India’s cost advantages and talent pool, making it a standout in a globally declining office real estate market.

—🛫 Pilot Fatigue in Focus Again! A 28-year-old Air India Express pilot died of cardiac arrest in Bengaluru during his fourth sector of the day, sparking fresh concerns around crew fatigue. While the airline has cited a medical condition, the incident comes as the Directorate General of Civil Aviation (DGCA) prepares to implement stricter duty-rest norms starting in July. The Core had earlier reported how overworked pilots, long hours, and fatigue are becoming a growing aviation safety risk in India. Pilots and crew have also accused DGCA of turning a blind eye to the worsening work conditions.

PODCAST

On Episode 554 of The Core Report, financial journalist Govindraj Ethiraj talks to Ajay Bagga, Market Expert.

1. Global markets rejoice on 90-day tariff pause, take stock

2. Why bond markets and not stock markets can destroy fortunes and Governments

3. TCS net profits are down as revenue touches Rs 2.59 trillion

4. Global commodity prices are crashing

5. Microsoft is pulling out of data centres

😒 UGHH

The Trump administration shut down the Office of Citizenship and Immigration Services (CIS) Ombudsman, according to a Business Standard report. The department helped applicants, and in particular F-1 and H1-B visa holders, resolve delays and disputes with the United States Citizenship and Immigration Services (USCIS). This latest move is part of a slew of anti-immigrant actions by the US: deportations of undocumented migrants, revoking the status of students on F-1 visas, and potentially also disallowing international students the OPT, a one-year work permit. 

Indians are among the largest group of students and H1-B visa holders in the US. Already, Indians face almost a decade-long waiting line to get a green card. This action will likely make their stay in the US even more uncertain and push them toward moving elsewhere. 

👥 THE TEAM

✍️ Zinal Dedhia, Salman SH, Kudrat Wadhwa | ✂️ Rohini Chatterji | 🎧 Joshua Thomas