As companies across the world reassess how their supply chains operate, “It could be India’s moment,” he said in an interview with CNBC-TV18.
For India to benefit meaningfully, Rajan stresses the need to roll out the red carpet—with a predictable tax and policy regime, assurances for foreign firms producing for the domestic market, and clear signals that such policies will be sustained over time.
However, the effort must go beyond offering subsidies and must focus on building a better production environment.
While some Indian states are already showing interest, Rajan believes much more proactive work is needed to create an environment that truly encourages foreign direct investment—something he feels has not received enough attention in recent years.
These are edited excerpts of the interview.
Q: If I can start by asking you on the good news on tariffs; not a framework deal, but at least an agreement to start talking or the one with the UK. Have you seen the peak of the good news cycle as far as tariffs go and will things get more contentious into the rest of 2025, what is your assessment?
A: What we need to have is more certainty on where the tariffs will land. Right now, we have, as you just said, an agreement to talk. But at the end of this talking, what happens and talking takes a long time. So even while people are talking, are tariffs going to go back to the Liberation Day level on July 9, and 10, for the rest of the world, is it going to go back to the Chinese levels on August 10, and 11? The sense is certainly the level of tariffs that were announced on Liberation Day are probably untenable, and so they will have to be negotiated down. But where and when is the kind of uncertainty that harms business considerably also. A lot of businesses are waiting to see are they going to keep the tariffs at least while the talk is going on at the 10% level for most of the world, or is it going to go back up? So, some certainty on that would also be most welcome.
Q: If you look at big global markets, they are all a few percentage points away from all-time highs. It’s almost as if tariffs really will not hurt or they are pricing in little to no damage because of tariffs. What is your sense, is it possible we escape any consequences or do you think it will show up, maybe a little later?
A: There is something somewhat funny about financial markets, that as far as policy goes especially when policy is as unpredictable as in the current situation, it seems to almost be putting a probability of one based on the current environment persisting. So, when the US raises tariffs on Europe, immediately, markets react negatively. The moment there is a discussion of a pause, they react positively. I don’t think markets are really pricing outcomes effectively. They don’t quite know, and they are putting a lot of weight on continuity right now.
Q: Do you think the tariffs are being used by the Trump administration as threats to negotiate, or do you think they are very ideological about this? He wants to effect change and bring American manufacturing jobs back to the States. Is this going to be a lasting theme throughout?
A: Tariffs are not going to go back to the old levels. There is some level which will stay, maybe the 10% and certainly maybe more in certain areas like autos, and that’s partly because of the ideological underpinnings of the current administration. They do believe the US has been unfairly treated by the rest of the world, but they also believe that tariffs can give the US a certain amount of sort of playing power.
But right now, with the big beautiful bill under consideration, tariffs also play a role in being a source of revenue. The US desperately needs a source of revenues to justify the level of tax cuts that are coming in the bill. For all those reasons, plus the fact that it gives the US a lot of power because it’s a big market for the rest of the world’s goods, they are not going to go back to the old levels.
The question is: are they going to be uniform across the board, or are they going to be especially high for certain countries that are disfavoured? And what is the longer-term certainty about the levels that are reached? Could it be that the administration turns on a dime and starts elevating them again for a country that it doesn’t like or that has as antagonised it. A lot is up in the air, but almost surely, we are not going back to the 3% level that the US was happy with before it will be a higher level of tariffs.
Q: We are looking at two very big sort of events playing out right now. One is tariffs and whether the Trump Administration can bring manufacturing back to the US or not. The second piece is the US deficit, and the bill is only going to be boosting that further. In the near to medium term, let us say, if you take a two to three-year view, what is the big economic reset that you forecast for the US economy? And, therefore, do you expect at least a small flight of money away from US assets, treasuries, equities etc.?
A: First, the short run tariffs are disruptive, even to manufacturing, so we will see the consequences in the second half of this year. Will it bring back manufacturing jobs? Probably no hope, not a whole lot, because a lot of manufacturing, even in India, has been automated. Look at a cell phone assembly line in India, and you have seen machine after machine. These are not people screwing in stuff into the mother board that that job disappeared a long time back.
When the jobs come back to the US, to the extent they come back, they have to take into account the high cost of labour in the US, which means it’s going to be largely automated jobs. And jobs that will be created would be for technicians who would man the machines, not for the guys doing the work directly. So big increase in manufacturing jobs unlikely.
But in the longer run, one of the concerns this has created in the rest of the world is, are we overly exposed to the United States? And you can see it in the talk amongst financial investors. 70% of global stock valuation was in the US and now people are saying, well, maybe we are overly exposed. We need to rebalance our portfolios, both on the equity side, but also on the fixed income side: are we holding too much in US Treasuries?
When you talk reset, this portfolio rebalancing will play out for some time. It is one reason why the US dollar hasn’t appreciated even while there are global concerns about economic growth. It’s because people are saying, do I really want to put more assets in the US at this point and many portfolio managers are saying, maybe I need to rebalance, not necessarily because US growth is going to fall off a cliff, but because I just think I am overly exposed to my sense that the US exceptional performance will continue.
More broadly, we are going to see supply chains move near a home, wherever home is. That is a process that has been underway, but that will get a special oomph under President Trump’s policies.
Q: Do you then see only a mild reset in market flows or in sort of investment portfolios and what about the deficit? Every year there’s a debate on the deficit, and then they sit on the fence, eventually the bill gets passed. How do you see that shaping up, and therefore what happens to yields?
A: It’s not a mild reset. There is going to be a significant reset, especially as areas like Europe start considering whether they should be spending more, whether they need more financing, and Europe has been sending a lot of capital to the US. As Europe starts doing more infrastructure, as it does more defence spending, some of that financing will go towards financing European asset creation.
There is going to be a global reset in portfolio holdings and that will also be accompanied by price changes. You are already seeing a somewhat weaker dollar than anticipated at the beginning of the year, and that’s something that could possibly continue so this is on the cards.
The big beautiful bill is not yet fully done. The Senate will have a role to play. And some of the worries in recent days, which has sort of shown up in higher yields, not just for US long term assets, but also across the world, Japanese long-term bonds, people are very wary at this point about being locked in to longer-term investment in government securities, given the uncertainty about fiscal space, both in the US, but also in Japan as well as Europe. What this means is that you can’t take US financing for granted.
The US debt to GDP is crossing 100% net in the next couple of years, and add to that a wider fiscal deficit embedded in a big beautiful bill, and there are some sort of fiscal engineering also embedded in it, which says some of the spending or some of the tax cuts will come to an end at the end of the Trump administration that is probably unlikely. So when you put it all together, this bill has to satisfy markets that it is not totally responsible, and the Senate, including the Senate Republicans, will have to play a role there.
Q: I wanted your view on India being able to get a fair share of the global supply chain diversification. Do you think lot of MNCs will look to set up shop here in India?
A: Well, it could be India’s moment. I think that certainly all supply chains are being reinvestigated by the firms that run them. And if India can put out the red carpet and say, we will have a predictable tax and policy regime, we will allow you to also produce for the domestic market and don’t worry about the pushback from Indian industry which feels threatened, we will make sure these policies are in place for the foreseeable future, it could result in a significant increase in foreign direct investment.
Of course, industrial countries don’t want to see supply chains moving from China to India and not coming back into the domestic market. But if India plays its cards well and doesn’t make it front and center all about subsidies, that it is about a better production environment, and it offers a very viable alternative, and some of the states in India are very interested in doing this. If we can do that, it could be India’s moment. But a lot more action is needed, and it has to be proactive, not just reactive. It is about creating a better environment in India for foreign direct investment, something we haven’t paid enough attention to in the last few years.