Tariff Framework Explained
A pivotal agreement has been reached between India and the United States, establishing a framework for a new trade deal. Under this accord, the United States has committed
to significantly reduce import duties on Indian merchandise, bringing them down from a substantial 50 percent to an 18 percent. This adjustment is particularly impactful given the previous imposition of stringent tariffs by the US on goods entering its market, which took effect on August 27, 2025. Tariffs, in essence, are customs duties levied by a nation on goods imported from abroad, acting as a cost for importers that is often passed on to consumers, thereby increasing the price of foreign products. The decision to lower these duties also considers competitive factors, such as the existing tariff rates applied to India's trade rivals like Bangladesh, Vietnam, and Thailand, which stand at 20 percent and 19 percent respectively, alongside the quality and standards of the imported items. This move is a direct response to earlier US actions in August 2025, where a 25 percent tariff, plus an additional 25 percent punitive duty for sourcing Russian crude oil and military equipment, was implemented on top of pre-existing tariffs, making Indian goods considerably more expensive in the American market. Prime Minister Narendra Modi expressed his satisfaction, noting that 'made in India products will now have a reduced tariff of 18 percent,' signifying a major win for Indian manufacturing and export capabilities.
Rationale Behind US Tariffs
The United States has articulated its rationale for imposing tariffs on Indian goods, citing a considerable trade deficit with India. According to US assertions, New Delhi has been accused of maintaining high tariffs on American products, which are perceived as a barrier that constrains the export of US goods into the Indian marketplace. This sentiment was echoed in statements made by former President Trump, who, following discussions with Prime Minister Modi, indicated an agreement to reduce reciprocal tariffs. He noted that as a gesture of friendship and respect, and at Prime Minister Modi's request, the US would lower its tariff rate from 25 percent to 18 percent. Furthermore, Trump stated that India would reciprocate by eliminating its tariffs and non-tariff barriers against the United States, alongside a commitment to 'BUY AMERICAN' at a significantly higher level, potentially involving over $500 billion in US energy, technology, agricultural, coal, and other product purchases.
Key Deal Provisions
The recently established trade pact between India and the US outlines a multi-faceted approach to tariff adjustments. India is expected to immediately remove duties on a selection of goods, while for others, duties will be phased out over time. In certain sectors, tariffs will be reduced, and for specific products, quota-based tariff concessions will be offered. However, it is important to note that sensitive areas, such as the dairy and agricultural sectors, have been entirely excluded from the scope of this agreement. Further clarity on the specifics of these tariff issues is anticipated through an executive order from the US side, and a joint statement is expected to detail the sectors that fall within the purview of this agreement. These official pronouncements are keenly awaited by industry stakeholders.
Benefits for India
This trade agreement is poised to offer a significant boost to India's labour-intensive industries. Sectors like garments, leather and non-leather footwear, precious and semi-precious stones, plastics, chemicals, carpets, and handicrafts, which previously faced high tariffs of 50 percent on their exports to the US, are now set to benefit from the reduced 18 percent duty. This reduction is expected to make Indian products more competitive in the American market, potentially leading to increased export volumes and enhanced market share for these goods. The ability to price products more competitively against those from other nations will be a key advantage. Major competitors in these sectors, such as China, Vietnam (20 percent), Malaysia (19 percent), Bangladesh (20 percent), Cambodia, and Thailand (each at 19 percent), will now face stiffer competition from Indian exports due to the newly implemented tariff structure.
Bilateral Trade Landscape
The United States has consistently been a leading trading partner for India in terms of goods. During the 2021-25 period, the US accounted for approximately 18 percent of India's total exports and 6.22 percent of its imports, contributing to a substantial 10.73 percent of their bilateral trade. In the fiscal year 2024-25 alone, bilateral trade reached an impressive USD 186 billion, comprising USD 86.5 billion in exports from India and USD 45.3 billion in imports. India has historically maintained a trade surplus with the US; this surplus stood at USD 41 billion in 2024-25, following USD 35.32 billion in 2023-24 and USD 27.7 billion in 2022-23. In the services sector, India's exports to the US were estimated at USD 28.7 billion, while imports were USD 25.5 billion, resulting in a surplus of USD 3.2 billion. Cumulatively, India's overall trade surplus with the US approximated USD 44.4 billion.
Major Traded Products
The exchange of goods between India and the US encompasses a wide array of products. In 2024, India's primary exports to the United States included drug formulations and biologicals valued at USD 8.1 billion, telecom instruments at USD 6.5 billion, precious and semi-precious stones worth USD 5.3 billion, and petroleum products amounting to USD 4.1 billion. Other significant exports comprised vehicle and auto components (USD 2.8 billion), gold and other precious metal jewellery (USD 3.2 billion), ready-made cotton garments and accessories (USD 2.8 billion), and iron and steel products (USD 2.7 billion). Conversely, India's key imports from the US during the same period included crude oil (USD 4.5 billion), petroleum products (USD 3.6 billion), coal and coke (USD 3.4 billion), cut and polished diamonds (USD 2.6 billion), electric machinery (USD 1.4 billion), aircraft, spacecraft, and their parts (USD 1.3 billion), and gold (USD 1.3 billion).
Services Sector Dynamics
Beyond merchandise trade, the services sector represents another crucial dimension of the India-US economic relationship. Estimates indicate that US services imports from India reached approximately USD 40.6 billion in the calendar year 2024. Among these, computer and information services constituted a significant portion, with imports valued at USD 16.7 billion. Business management and consulting services also represent a substantial category, with US imports from India amounting to USD 7.5 billion in the same period. This robust trade in services highlights the deep integration and interdependence of the two economies, with India playing a vital role in providing essential services to US businesses.
Future Purchase Commitments
As part of the overarching trade agreement, India has committed to significant purchases from the United States, projected over a five-year period. This includes substantial procurement of oil and gas, advanced technology items such as sophisticated chips and data centre equipment, precious metals and gems, and a considerable number of aeroplanes and their associated parts. These anticipated purchases are expected to reach a value of over USD 500 billion. Notably, the aviation sector alone is projected to involve orders either already placed or in the pipeline worth approximately USD 100 billion, underscoring the scale of these future trade commitments and their potential to rebalance the bilateral trade flow.
