India-US trade deal is costly but much-needed

India-US trade deal

After successfully concluding the “mother of all trade deals” with the European Union, India has now reached a trade deal with the Trump administration that will allow its exporters to access the US market at an 18% import tariff.

The partial rollback of Trump’s tariffs brings Indian exporters on par with — or even better than — regional competitors such as Bangladesh (20%), Indonesia (19%), Pakistan (19%), Vietnam (20%), and China (37%). It is therefore rightly welcomed by the country’s stock market, with the benchmark Sensex rising by more than 2,000 points.

It is not so much about India securing an 18% post-deal tariff — which is still higher than pre-Trump levels — after President Trump announced a reciprocal tariff of 25%, followed by another 25% penalty for buying Russian oil. Rather, the India–US trade deal reduces regulatory uncertainty and improves market sentiment, even if only temporarily. That, in itself, is a significant relief for India Inc.

What’s behind Trump’s softening on India?

Several explanations have been offered for the Trump administration’s decision to roll back tariffs on India and extend a relatively more accommodating trade arrangement than many other partners have received. At its core, however, the shift appears less about goodwill and more about a steady erosion of U.S. bargaining power.

One factor is the changing global trade landscape. The successful conclusion of long-pending trade negotiations between the EU and India, along with the EU–Mercosur agreement, signalled that major economies were increasingly willing to move forward without Washington. This coincided with growing strains between the U.S. and its traditional allies — visible in disputes ranging from Greenland to trade frictions with Canada, which is exploring deeper engagement with China. Together, these developments have weakened the credibility of U.S. pressure tactics. India’s refusal to concede quickly to American demands only reinforces this trend.

An additional constraint emerged on the domestic front. There loomed the possibility of adverse judicial rulings challenging the President’s authority to impose broad, discretionary import tariffs. Any such ruling would significantly undermine Trump’s leverage in trade negotiations, making compromise a more attractive option than continued escalation.

India’s exporters didn’t compromise on price

Contrary to expectations, with a little support from the steadily weakening INR—as highlighted by the Economic Survey—Indian exporters of many labor-intensive products such as rice and shrimp didn’t cut prices and instead reduced volumes, as shown by research from the Kiel Institute of World Economy. Many others have shifted to other markets such as China, the European Union, and Vietnam, leaving American consumers to bear the burden of Trump’s tariffs.

The relatively lower-than-expected impact on Indian exports allowed the Indian government to adopt a patient wait-and-watch approach, which appears to have paid off, at least for now.

What it means for lndian businesses?

The initial reaction of the country’s stock market suggests that investors view this as big positive news — and it indeed is. It brings relief at a difficult time when FPIs have been pulling out, especially after the Budget 2026 increased the STT (Securities Transaction Tax) amid a steadily weakening INR.

As expected, the major beneficiaries of India–US trade — much like its trade deal with the EU — would be labour-intensive sectors such as agriculture and food products, auto components, gems and jewellery, leather goods, and textiles in particular.

However, one must not forget that the US–India trade deal largely restores the status quo for Indian textiles, as pre-Trump era import duties were already in the range of 18%. The key gain for textiles is the removal of competitive disadvantages vis-à-vis countries such as Bangladesh, Pakistan, Indonesia, and Vietnam.

Long-standing domestic impediments to India’s textile sector — including lack of fibre neutrality and an inverted duty structure — remain unchanged. In addition, any strengthening of the INR against the US dollar following the deal could dilute gains for India’s labour-intensive exports. Moreover, even post-deal, tariffs on Indian textiles will remain at around 18%, compared to zero for the EU, making European markets relatively more attractive for Indian merchandise.

The trade deal will have little Impact on India’s top exports — notably electronics and mobile phones, pharmaceuticals, and refined petroleum products — as these were already exempt from the application of Trump’s 50% tariffs.

Trade deals are always about give and take. But with President Trump, it is often unclear what — and how much — one may need to give in return. Expectations, therefore, should be tempered.

Potential costs of the deal

As per Trump’s tweet, India has agreed to stop buying Russian oil and to purchase American energy, agricultural, and technology products worth US$500 billion. In return for an 18% import duty, India is also expected to reduce its tariffs and non-tariff barriers significantly to allow freer entry of American products. However, based on the statements and tweets from US administration officials so far, it remains unclear whether this is a goods-only trade deal or a comprehensive agreement covering services, government procurement, and investment protection. That will ultimately determine the overall benefit and cost of the deal for India.

Despite the initial stock market exuberance, it’s a costly trade deal in terms of what India needs to deliver. India’s farm sector is likely to be unhappy as it seems India has agreed to allow freer imports of American agricultural products such as corn and soybean. It’s not clear as yet if that also includes genetically modified crops or not. But the processors of ethanol and poultry feeds will benefit from freer and cheaper imports of American corn. It also remains uncertain as of now whether India has offered any concessions on dairy products — which would go beyond what New Delhi has so far offered to Australia, New Zealand, or the EU.

Dropping discounted Russian energy would be a difficult choice for India, given its long-standing commercial and strategic relationship with Moscow. However, renewed access to Venezuelan oil could partially mitigate the impact by offering an alternative source of discounted crude, even if it cannot fully replace Russian supplies.

Overall, the deal does not bring India back to the pre-Trump trade environment. Yet, compared to the prospect of facing 50% tariffs, it represents a clear improvement — and that makes it broadly positive news for Indian businesses.

RITESH KUMAR SINGH is a business economist and CEO, Indonomics Consulting Private Limited. His X account @RiteshEconomist.)

(PRERNA SHARMA SINGH is a director on the board of Indonomics Consulting Private Limited, and heads its agriculture, food and retail practice.  Her X account @AgriFoodRetail.) 

Views are personal, and do not represent the stand of this publication.