Can Musk make India's situation worse?

This report is from CNBC's “Inside India” newsletter this week, which provides timely, insightful news and market commentary on the emerging powerhouse and the big companies behind its meteoric rise. Like what you see? You can subscribe Here.

Recent whispers from Washington suggest that tariffs are unlikely to be broad. Scott Bessent, the hedge fund billionaire and Trump's pick for Treasury secretary, is also expected to unveil his vision for U.S. trade policy today during his term Senate confirmation hearing this reinforces the concept of focused responsibilities.

However, it is another billionaire – Elon Musk – who is likely to have a huge influence on US trade policy with China, which could harm India's economic growth.

Musk, as boss Teslahas huge economic exposure to China through the carmaker and will want trade policy between the two superpowers to be settled as soon as possible rather than allowing tensions to rise.

There is also the possibility that the Chinese government views Musk as an operator who could help ease tensions between Beijing and Washington. China is reportedly currently considering a plan to make this possible Musk, who also owns social media platform X, is taking over TikTok's US operations to prevent the application from being effectively blocked. TikTok has denied these reports and says it will not sell its US operations.

While Musk is not the only one with business interests in China, he is part of the future president's inner circle of close advisers and could potentially play a key role in a U.S.-China trade deal.

“It would undoubtedly be a negative outcome for India if the US brokered a deal with China,” said Gaurav Narain, portfolio manager at the London-listed India Capital Growth Fund. “Companies are clearly exploring alternatives to China, which represents a significant opportunity for India.”

“However, if a negotiated agreement were reached, the urgency to find an alternative would disappear as China remains more cost-competitive and boasts a full supply chain,” Narain added.

The Tesla boss has previously spoken publicly about his complaints about India's “by far the highest in the world” tariffs on car imports. Instead of supporting India, Musk, now listening to Trump, may reignite trade tensions between India and the United States over Indian import tariffs.

In an attempt to convince Musk and also partially divert attention from its own tariff policy, the Indian government has temporarily reduced import tariffs on electric vehicles to 15% in 2024, after keeping them at 100% for many decades.

Economists, however, suggest that Trump has surrounded himself with enough China hawks that even reaching a trade deal will only cause companies to delay their exit from China, not stop it altogether.

“I think it may be that the flow of this investment (into India) is slowing down because companies are looking at this and thinking, 'Oh, we have another four years,'” said Michael Langham, India economist at asset management firm abrdn. “I don't see companies thinking so short-term that they don't plan ahead for the long-term trend of supply chain diversification.”

Others also suggest that, in addition to the trade tariffs imposed by Trump during his first administration, the Covid-19 pandemic also contributed to the corporate strategy of withdrawing from China.

“I think the reasons why companies are moving their supply chain are much deeper, and that's why they're likely to continue to do so,” Sonal Varma, chief economist at India-based Nomura, told CNBC in late December. “I think the U.S.-China trade imbalance is a small part of, actually, a larger problem,” Verma added.

There is also evidence that Musk hasn't always gotten along with Trump either.

Tesla's boss supported Howard Lutnick, CEO of Cantor Fitzgerald investment bank, as a candidate for Treasury Secretary. But instead, Trump chose billionaire hedge fund manager Bessent to lead the U.S. government's finance department.

Inflation slowing in India. Inflation in India in December was approx 5.22% year on yearaccording to the Ministry of Statistics and Program Implementation. The reading is lower than the 5.30% forecast by Reuters analysts and is the second month in a row of slowdown in inflation. A softer inflation reading gives the RBI room to cut interest rates, in the face of slowdown in economic growth in the country.

China may delay exports to India. Shri S. Krishnan, Secretary, Ministry of Electronics and Information Technology, on Tuesday said that the government has received feedback from industry firms such as Foxconn that capital equipment was held in Chinese ports for several months. China has not announced any formal restrictions, but Beijing may informally lead the move, Krishnan said.

The Indian government sees no problems in the supply of currency or oil. The Indian rupee has fallen against the US dollar this week, but the government has enough foreign exchange reserves to do so stop any excessive currency movements– say government sources. The government is also confident that India will not experience any shortage or surge in oil prices after the US imposes measures new sanctions on Russian oilof which India is one of the leading recipients.

Using options to profit from India. The Indian economy is currently experiencing a slowdown. However, the growth aspects, as forecast by the United Nations, are still strong compared to other global markets. One of the best ways play the Indian market with optionsaccording to the investment company's chief strategist. (For subscribers only)

Indian stock markets seem to be recovering after a disastrous start to the year. The Nice 50 the index fell by 0.5% this week, but has been in an upward trend for several days. The index is down 1.41% this year.

The yield on benchmark 10-year Indian government bonds briefly rose 10 basis points last week but fell to 6.75% on Thursday.

On CNBC this week, Neelkanth Mishra, chief economist at Axis Bank, said the Indian rupee was struggling with “excessive stability.” In the last two years rupee volatility was more limited than other global currencies, Mishra said. This is because the Reserve Bank of India had a policy of currency stabilization and, according to Mishra, could maintain this position “much longer than would have been necessary.”

Meanwhile, Sumeet Jain, senior research analyst at CLSA, told CNBC that valuations of Indian IT names “have declined over the last two years despite earnings decline.” Yet Jain is “cautious optimism“about the sector as India's macroeconomic conditions are on an upward trend.