India appears well-positioned to benefit from shifting global trade dynamics. As the US raises tariffs on Chinese and Southeast Asian goods, the stage could be set for trade diversion—and India, with its large labor force and established export base, might seem like a natural beneficiary. But this opportunity is not without complications. India’s competitiveness in these sectors has waned in recent years, and without meaningful structural reforms, the country risks falling short of its potential just as the window opens.
One way to assess export competitiveness is through the lens of Revealed Comparative Advantage (RCA)—a measure of whether a country exports more of a product, relative to the global average. India does have an RCA greater than 1 in textiles, leather, and footwear, which suggests a theoretical edge. However, it captures only 0.3% of total US imports in these sectors—well below Asia’s 2.6% share. With US imports in these categories equating to 4.3% of India’s GDP, even modest gains in share could drive meaningful export upside. Yet India’s RCA in these sectors has been declining since 2016, signaling a slow erosion of competitiveness. Without targeted reforms – such as easing labour regulations, improving worker skills, rationalizing tariffs, and continuing infrastructure investments – the opportunity may remain unrealized.
On the other side of the trade equation lies the risk of import pressure. If Chinese exports face barriers in the US and ASEAN, China may redirect its excess capacity to other markets—including India. This raises concerns of Chinese goods flooding Indian markets, particularly in machinery, electronics, plastics, and footwear—sectors where China has a strong comparative edge and India is already a major importer. The threat is not just to trade balances, but to domestic manufacturing and the investment cycle, both of which could be crowded out by cheaper imports.
In conclusion, while India’s structural story remains strong, the current macro backdrop is less compelling. Real interest rates are high, fiscal policy is tightening with a 0.4% reduction in net spending, and the credit impulse is negative. Corporate earnings face cyclical headwinds just as valuations remain expensive. Against this backdrop, the trade war may offer potential, but without stronger domestic execution, it’s unlikely to be a near-term catalyst. This is why we remain underweight Indian equities, preferring markets where the opportunity is clearer and more immediately actionable.
DISCLOSURES
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