A Tariff Reduction Win
India and the United States have reached a significant trade agreement, marking a pivotal moment for Indian exporters. A key outcome of this pact is the substantial
reduction of tariffs imposed on goods sent from India to the US. Previously, Indian exports faced a 25% levy linked to the purchase of Russian oil, a rate that had been in place since August of the previous year. This new reciprocal tariff is now set at 18%, a notable decrease that positions Indian goods more competitively. For perspective, this new rate is lower than the duties faced by exporters from countries like Vietnam, Bangladesh, and Indonesia, and significantly less than the 37% tariff applied to Chinese goods. Analysts estimate this change will effectively lower the average tariff burden to approximately 14.6%, a sharp drop from the previous 33.6%.
Export Edge and Economic Impact
The implications of this trade deal for India's export sector are substantial, especially considering the US is India's largest trading partner, accounting for nearly a fifth of its exports. With US exports valued at $85.5 billion in FY25, the new tariff structure grants Indian businesses a tangible competitive advantage over many rivals in the American market. While there are claims from President Donald Trump regarding India's commitment to purchasing $500 billion or more in US goods, requiring further clarification, it's highly probable that India will increase its acquisition of products already under discussion, such as oil, defense equipment, data-center hardware, technology, and aircraft. In the immediate future, an uptick in exports to the US is anticipated to alleviate pressure on India's merchandise trade deficit and its currency, the rupee, potentially contributing an estimated 20-30 basis points to the nation's economic growth. The adeptness and persistence of India's trade negotiators in managing discussions with a US administration known for its firm bargaining and evolving demands are commendable.
Strategic Context and Caution
The timing of this trade announcement may be strategically linked to the recent conclusion of the India-European Union trade deal, which saw India open its market to European products like automobiles. This suggests that while the US is a more dominant trading partner, it shares a keen interest in accessing India's expansive consumer market. Nevertheless, an attitude of complacency would be imprudent despite the positive reception of the agreement. The inherent unpredictability of US trade policy, demonstrated by its frequently shifting terms with other nations, serves as a critical lesson. Therefore, India must maintain its pursuit of free trade agreements that align with its national interests, and its exporters should continue their efforts to diversify their markets, a strategy they've already been implementing since last August.
Unresolved Issues and Future Outlook
Several key questions surrounding the exact quid pro quo of this deal remain. The precise nature of India's concessions in return for lower tariffs requires further elucidation. One potential offer could be a further reduction in the purchase of Russian crude oil, a long-standing request from President Trump. Indeed, Petroleum Minister Hardeep Puri has indicated that Russian oil imports are expected to decrease further, with refiners exploring increased supplies from Canada and the US. This suggests a government willingness to diversify energy sources, even after considering the implications for its relationship with Russia. While not all US imports into India will be duty-free, as President Trump might suggest, the exemptions are expected to be limited. Importantly, India's agricultural and dairy sectors are slated for protection, as stated by Commerce Minister Piyush Goyal, indicating these sensitive areas will be safeguarded. However, New Delhi might consider aligning more closely with international sanitary and phytosanitary standards to facilitate selected agricultural imports. Additionally, there's potential for easing technical and regulatory barriers in specific sectors, including a possible revision of quality control orders. Long-standing requests from US e-commerce companies, such as allowing platforms like Amazon to maintain inventory, may also gain traction, painting a distinctly brighter outlook for 2026 after a turbulent preceding year.
