For India, the challenge will be to absorb tariff shock while capitalising on domestic growth: Jim O’Neill

Former UK Treasury Commercial Secretary and ex-Chairman of Chatham House, Jim O’Neill, said India’s surprise tariff shock will test markets in the near term, but the country’s domestic-driven economy remains a strength in an uncertain global environment.

Speaking to ET Now, O’Neill said the 50% tariff imposed on India has come as a major surprise. “Who would have dreamt back in February that this is where things might have settled on tariffs for India? I don’t think equity markets have fully priced this in,” he noted.

Looking ahead, O’Neill warned that inflation and interest rate risks in developed economies remain a concern. “Markets may be hopeful, but there are signs of stress. For India, the challenge will be to absorb the tariff shock while continuing to capitalise on domestic growth,” he said.

He pointed out that global markets are still being lifted by the ongoing AI boom, especially around Nvidia, which has made them appear “too relaxed” despite major risks from tariffs and inflation. “I’m not as comfortable as equity markets seem to be, in India or elsewhere,” he said.

US equities may underperform rest of the world this decade

Looking at the bigger picture, O’Neill reiterated his earlier view that US equities may underperform the rest of the world this decade. “Trump’s policies are weakening the US dollar and the institutional strengths of the American economy. This is forcing countries, including India, to rethink alliances and rely more on domestic and regional growth,” he explained.

Currently, global bond and equity markets appear optimistic about potential outcomes. However, O'Neill sees some warning signs. It could be that equity markets are looking beyond these issues, anticipating a different global rotation, with countries like India reaffirming their status as domestically driven economies. Other economies may also shift toward greater domestic focus—a possibility that could prove beneficial for the global economy.

Healthy correction in Indian market

In India, O’Neill acknowledged that after years of outperformance, the market has begun to cool. “This correction is probably healthy. India was showing signs of excess, especially with the surge in equity derivatives. The underperformance this year makes valuations more reasonable, though not cheap,” he said.

He added that India’s inward-looking economy offers resilience, especially as globalisation faces pushback. “India has the natural advantage of being driven largely by domestic demand. If Prime Minister Modi’s outreach to Beijing produces even small positive shifts, it could add a new dimension to India’s long-term story,” O’Neill said.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of the Economic Times)