Why in News
The United States has lowered tariffs on Indian exports to 18%, down from an effective rate of nearly 50% that had included punitive duties. The move marks a de-escalation of bilateral trade tensions and underscores India’s growing strategic relevance to the US in the Indo-Pacific. It also reflects a broader geopolitical realignment driven by supply-chain diversification and energy security considerations.
Key Features of the India–US Trade Understanding
Tariff Rationalisation
- The US reduced the reciprocal tariff from 25% to 18%.
- The additional 25% punitive duty imposed in August 2025 over India’s Russian oil imports has been withdrawn.
- The effective tariff burden has fallen from around 50% to 18%, restoring competitiveness for Indian exports.
India’s Commitments
- Energy Rebalancing: Gradual reduction in dependence on Russian crude, with higher imports from the US and potentially Venezuela.
- Market Access: Possible reduction of tariffs and non-tariff barriers on selected US products, including near-zero duties in specific sectors.
- Large-Scale Procurement: Prospective purchases of up to USD 500 billion worth of US energy, agricultural, coal, and technology products.
- Buy-American Tilt: Increased preference for US suppliers in large public and industrial procurements.
Evolution of Tariff Tensions
- The US has long criticised India’s tariff structure, often branding it a “high-tariff” economy.
- Mid-2025: A 25% reciprocal tariff was imposed to match India’s average import duties.
- August 2025: An additional 25% punitive duty followed India’s continued imports of Russian oil.
India’s pre-deal confidence-building measures included:
- Selective duty reductions (e.g., heavy motorcycles, bourbon whisky).
- Enactment of the SHANTI Act, 2025, opening the nuclear sector to private participation.
These steps helped ease trade frictions and pave the way for the current agreement.
India–US Trade Snapshot
- Bilateral trade (FY25): USD 132 billion (up from USD 119.7 billion in FY24).
- India’s trade surplus: USD 40.82 billion.
Major US exports to India:
- Mineral fuels and oils
- Nuclear reactors and machinery
- Electrical equipment
Major Indian exports to the US:
- Electrical machinery
- Pharmaceuticals
- Gems and jewellery
- Iron and steel products
The US is India’s third-largest investor, with cumulative FDI of USD 70.65 billion (2000–2025).
Strategic Architecture of the Partnership
- US–India COMPACT (2025): Focuses on military cooperation, commerce, and technology.
- Mission 500: Target to raise bilateral trade to USD 500 billion by 2030.
- Ongoing negotiations for a Bilateral Trade Agreement (BTA).
Significance of the Tariff Cut
For India
- Export Boost: Enhanced competitiveness for textiles, pharmaceuticals, gems, and engineering goods.
- Relative Advantage: Lower tariffs than Vietnam and Bangladesh (~20%) and significantly below China (30–35%).
- Macroeconomic Stability: Reduced trade uncertainty, supporting currency stability and investment inflows.
- Friend-shoring Gains: Strengthens India’s position as an alternative manufacturing hub amid global supply-chain reconfiguration.
For the United States
- Energy Exports: India’s high import dependence (88.2% in FY25) makes it a reliable long-term market.
- Nuclear and Defence Access: Enabled by regulatory reforms under the SHANTI Act.
- Technology Collaboration: Expanded scope under iCET, including semiconductors and AI.
- Digital Infrastructure: Tax incentives support US investments in data centres and AI ecosystems.
Key Challenges
Strategic Autonomy
- Reduced Russian oil imports could strain long-standing ties with Moscow.
- Raises questions about India’s multi-alignment strategy.
Transactional Trade Diplomacy
- Reciprocal tariff matching reflects a quid-pro-quo model, linking strategic cooperation with economic concessions.
Risk of Chinese Retaliation
- China has signalled potential countermeasures.
- India remains vulnerable due to dependence on Chinese rare earths and pharmaceutical APIs.
Domestic Economic Pressures
- Opening dairy and poultry markets to subsidised US products could affect farmers.
- Higher energy import costs may widen the current account deficit.
Regulatory and Digital Frictions
- Stringent US SPS norms restrict Indian agri-exports.
- Pressure on intellectual property norms may raise healthcare costs.
- Tensions persist over data localisation versus free data flows.
Way Forward: Leveraging the Trade Pivot
- Safeguard Energy Security: Scale renewables, green hydrogen, and nuclear power.
- Export Diversification: Accelerate FTAs with the Gulf and East Asia to avoid over-dependence.
- Targeted Protection: Use calibrated safeguards instead of broad tariff cuts.
- Manufacturing Deepening: Shift from assembly to value-added manufacturing under Make in India.
- Innovation Partnerships: Collaborate in AI, semiconductors, and space while protecting public-interest sectors.
- Farmer Protection: Focus on processed and high-value agricultural exports.
Conclusion
The reduction of US tariffs to 18% offers India a strategic opportunity to enhance export competitiveness and integrate into reconfigured global supply chains. However, sustaining long-term gains will require careful balancing of trade openness with strategic autonomy, protection of domestic sectors, and the creation of a resilient manufacturing ecosystem aligned with the vision of Viksit Bharat.