Indo-US Trade Deal Promises To Be Contentious

By Nantoo Banerjee

The excitement over the finalization of the first tranche of the Indo-US trade deal during last weekend after months of negotiations and uncertainties may be irrational, if not too early, as it remains unclear about the US attitude towards India’s multi-alignment global trade and economic strategy combining countries such as Russia and Iran and how it could impact the trade deal. The US, the largest importer of merchandise from China, has been comparatively soft on China despite the latter’s strong trade and diplomatic ties with major US adversary nations, including Russia, Iran, North Korea, Cuba and Venezuela. With Russia, India has long been enjoying a strong multi-dimensional relationship, covering civil nuclear and defence sectors among others. India is also an investor in oil exploration and production in Russia. India’s trade deal with the US must not alter or impact its attempt to leverage its position as a “swing state” to gain maximum advantage from all sides while protecting its own security and developmental interests.

It is good that the United States has ultimately decided to lower “reciprocal tariffs” on Indian exports to 18 percent. In return, India will slash levies on several items of imports from the US. The trade deal also witnessed the US scrapping the 25 percent penalty on Indian exports for Russian oil purchases although it is not clear if it sought to prevent India altogether from buying oil from Russia. The deal will benefit India’s two major export groups – one comprising textiles, leather, chemicals and marine products; and the other including pharmaceuticals and smartphones. The two groups currently account for 56 percent of India’s exports to the US. The trade deal is expected to be more beneficial to the US exports of high-value industrial goods, over 90 percent of which will enjoy several concessions including tariff eliminations, duty cuts over 10 years and reduction based on quotas.

The trade deal appears to be somewhat mischievously over optimistic about India’s imports from the US growing up to $500 billion in the next five years. India is not a front ranking trading nation. Among the global trading nations, India ranks 10th as importer and 13th as exporter. Its manufacturing and consumption capabilities of high-value manufactured products have remained limited. In the last fiscal year, India’s goods imports from the US were valued at only around $45.33 billion. Expecting these imports to jack up by over 10 times to $500 billion in the next five years looks illogical despite new concessions. India is running huge international trade deficits year after year. Its economy could be rattled by such massive imports from a single country unless India decides to severely cut imports from other countries to contain its annual trade deficits. In 2024-25, India’s total merchandise imports from over 50 countries amounted to $720.24 billion while exports earned only $ 437.42 billion, leading to a merchandise trade deficit of US$ 282.83 billion.

The newly finalised framework for the first phase of a bilateral trade agreement with the US, committing a $500 billion annual import over the next five years, will focus on energy products (oil, LNG, LPG), commercial aircraft and parts (notably from Boeing), coking coal, precious metals, and high-tech products like Graphic Processing Units (GPUs) for data centres. Interestingly, Union Commerce Minister Piyush Goyal described this $500 billion figure as “conservative,” noting that India’s total import demand is projected to reach roughly $2 trillion over the next five years. That sounds truly tall. Much will depend on the growth rate of the economy, the purchasing power of its people and consumption. The $500 billion figure may include existing orders (such as previous aircraft orders) and new purchasing commitments. Ironically, India is in the process of signing a Rs.3.24 lakh crore deal with France to acquire 114 Rafale fighter jets, ahead of French President Emmanuel Macron’s visit to New Delhi on February 18 for the India-AI Impact Summit. If cleared, the deal will mark one of India’s biggest-ever defence procurements, deepening the India–France strategic partnership under the Make-in-India framework. France’s civilian aircraft manufacturer, Airbus Industrie, is the biggest supplier of passenger aircraft to India.

Thanks to the massive delay in inking a trade pact with the US, India signed last month a mega trade and economic cooperation agreement with the European Union which it branded as the “mother of all deals”. It allowed 93 percent duty-free EU exports over the next 10 years, covering 97.5 percent of overall EU trade value with India. The deal provides access for 99 percent of Indian exports, offering a strategic pivot away from reliance on the US market. Simultaneously, the EU and India concluded a wide-ranging security and defence partnership agreement, committing to closer counter-terror cooperation, stronger engagement in the Indo-Pacific region and joint development of military capabilities. Now, the Indo-US trade deal, largely on similar lines, threatens to prune the scope and the size of both the agreements accommodating India’s trade interests with the two giant trade blocks, the US and the EU. As mentioned earlier, India is not a major trading nation, globally. The appetite of the world’s most populous nation continues to be limited as of now. The pressure of imports from both the US and EU may further jack up India’s international trade deficits to destabilise the country’s economy unless India is able to significantly cut down imports from China, Russia, the United Arab Emirates, Saudi Arabia, Singapore and the Netherlands.

The latest trade pact with the US may open more challenges than opportunities before India, which itself is looking forward to becoming one of the world’s three top economic powers by 2047 competing neck-and-neck with each other. The turbulent trade disputes with the US through the last one year had forced India to consider reframing its relationship with its traditional key partners, including the US, focusing on technology, defence, and strategic collaboration, rather than blind trust. Instead of getting itself encompassed in the US trade trap, India would do well to continue to navigate the complex, high-stakes landscape characterized by intense great-power rivalries, economic nationalism, and the need to maintain strategic autonomy. The country should actively redefine its foreign policy, moving from passive non-alignment to an active, multi-aligned, and, at times, more assertive approach, driven by its ambition to become a leading global power within the next two decades. (IPA Service)

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