US President Donald Trump’s recent pledge to balance the US budget could have mixed implications for the Indian economy, even as his administration has yet to outline a concrete strategy to achieve this goal, said economists .
In his first address to a joint session of US Congress since returning to power, Trump, speaking for over an hour and 40 minutes, on Tuesday promised to balance the budget but did not provide specifics on the steep spending cuts or revenue measures needed to bridge the current fiscal deficit of over $2 trillion. However, Republican lawmakers responded with applause to his commitment.
Trump focused on tax cuts, calling on Congress to enact measures such as eliminating taxes on tips, overtime, and Social Security—proposals that, if implemented, could further widen the deficit, US economy watchers pointed out.
Potential Impact on India
Madan Sabnavis, Chief Economist at Bank of Baroda, noted that Trump’s approach prioritises expenditure cuts while exploring reciprocal tariffs to boost revenues. He highlighted that the planned reciprocal tariffs, set to take effect from April 2, could have implications for the Indian economy.
“The impact will also be indirect. If the US budget moves toward balance, the Federal Reserve may feel less pressure regarding government finances and could continue cutting interest rates based on inflation trends,” he explained.
A more balanced budget could also stabilise the US dollar, reversing its recent strength and benefiting India, he added.
A senior economist from a global professional services firm cautioned that efforts to balance the budget could slow US economic growth, potentially dampening demand for Indian exports. However, with the US aiming to bolster domestic manufacturing and using tariffs as a tool to attract industries, Indian services exporters may find new opportunities in the “servicification of manufacturing,” the economist noted.
Goal of balancing
Devendra Kumar Pant, Chief Economist and Head of Public Finance Practice, India Ratings and Research, said that it will take some time for the Trump administration to achieve the goal of balancing the budget and is unlikely to be achieved in a year or two. “If the US government as indicated were to go in for heavy expenditure compression or significant tax cuts or both, the US economy will get into a slow growth phase and the demand for goods and services from US households and corporates are going to decline. That will have an impact on goods and services exports from India”, he said.
Pant sees the US dollar strengthening further if the US were to eventually balance its budget. “Then the onus will be on how do we evolve our (India) policy. To tap the opportunity in manufacturing or services or both,” he said.
In 2024, India’s exports to the US stood at $ 91 billion, ranking tenth among the top exporting nations to North America. The US is India’s top export destination and its fourth largest source of imports.
On Monday, Trump went ahead with 25 percent tariffs on Canada and Mexico and raised his tariffs on China to 20 percent. The additional 10 percent tariff on China is against 60 percent level he had suggested in the election campaign.
Trump’s tariff actions and proposed reciprocal tariffs ( now to be implemented from April 2) have adversely impacted both US bond and equity markets with both falling since Trump’s inauguration on January 20. It has also fuelled exodus of foreign investors from emerging markets like India, prompting a near 15 percent correction in equity benchmarks of Nifty and Sensex.
