By Prof D M Deshpande
After months of hectic negotiations and actions, finally a trade agreement has been reached between India and the US. That it came days after the ‘mother of deals’ between India and the EU is significant to take note. It lends credibility to reports that the US blinked first.
The strategy of holding firm even while continuing negotiations with patience appears to have paid off. America is India’s leading trade partner. After all, it is a pact with the mother of all economies in a rapidly changing landscape of international trade. In FY 25 India’s merchandise exports to the US were valued at $85.5 billion and imports at $46 billion. Further, if other FTA’s with diverse nations and geographies-the UAE, the UK, Newzealand, to name only a few- are added, India’s clout in world economic order becomes clear.
Within a span of just one year, India has signed five trade agreements. It took years of negotiations to finalize the deal with the EU. Also in the pipe line are deals with Latin America and Canada. All these FTA’s helped India to tide over the crisis on the trade front with the US and also strengthened India’s hands in negotiations and finally clinching the deal.
What the deal does is that it immediately removes the hanging sword of uncertainty for Indian exporters. The reduction of reciprocal tariffs to 18% brings it on par with its competitors like Vietnam, Thailand and even China. According to reports, effective tariff rates on 232 goods like steel, electronics, textiles, agricultural goods, gems and jewellery will be cut to 12 to 13% from the current 30 to 35%.
This will bring back orders in some very labour intensive industries. It will be music for the ears of several small and medium firms across India. It is certain to reduce pressure on the Indian rupee, keep the current account deficit in check and significant relief to the export sector. While the pact is a welcome relief, it is important to note that the tariff rates, even after cuts from a peak level of 50%, are still higher compared to the period before Trump levied the first additional tariff. For instance in 2024, the weighted average rate for Indian goods exported to the U.S was just 2.5%.
It appears that India may have got the best deal. A reciprocal tariff of 18% is lower than similar tariffs on ASEAN including China. With some nations it may be just 1% advantage but the competitive edge with China (31%) seems to be striking. This will give a tremendous boost to China+1 strategy in manufacturing and diversifying major industrial supply chains. If this holds in letter and spirit, more FDI will pour into India; home investors too will gain confidence and put an end to the chronic problem of lack of growth of private investments.
The deal on energy is either problematic or it needs more details in the coming days. Trump claims that India will buy American goods and energy worth $500 billion though no time line is mentioned as of now. Considering the current imports of just $46 billion, it is not clear how the target will be achieved. Indian imports barely $7 to $8 billion of crude from the U.S which is about 12% of its energy trade. Imports from Russia are showing a significant decline after the US sanctions. Even if India stops all buying of oil from Russia and instead opt for the US crude, it will be no more than $12 billion. Taking logistics into account, the US oil will be expensive for energy dependent India. Inflation has largely been in check in India due to significant inflow of discounted oil from Russia. Even if Russia is ruled out, India has better options to import oil from its traditional sources in the Middle-East.
Oil from Venezuela has now come into picture. But it is heavy, dirty and can be made usable by just a handful of modern refineries in India. In any case, its current production is not even sufficient to cater to 1% of India’s needs. At best it will be a supplement, certainly not a replacement. It will take at least three to four years of huge investments to put in place the necessary production and export infrastructure. Not even the big US oil companies have shown interest in undertaking investments despite Trump’s best efforts to sell the idea.
Some key questions still remain. What is quid pro quo-for the reduction in tariffs the US is offering, what has India agreed to concede. Of course, it has already made adjustments and promised lowered duties on American automobiles, technology goods, chemicals and energy. It is improbable that India may have conceded on agriculture and dairy products, contrary to claims made by the U.S President and certain reports. The Indian Commerce Minister has said categorically farm and dairy will be protected at any cost. India has not yielded to similar demands by the EU, New Zealand and the UK. The US can collaborate with India in defence and related equipment, energy especially nuclear and coal, technology including research in high tech and AI.
With Trump there is no scope for predictability and certainty. Even after a treaty with the EU, the US President is threatening to levy a penalty over Greenland. Korea’s experience is no different. He could use similar tactics with India too and blame India for being in Bricks or active in the de-dollorazation process. Never in the past has America suffered from the kind of trust deficit it is now facing. The deal is big but it does not mean that India can do away with vigil and caution.
The author has four decades of experience in higher education teaching and research. He is the former first vice-chancellor of ISBM University, Chhattisgarh
