Navigating the Quicksand of Unpredictability, India’s Strategic Dance with a Volatile United States
The recent announcement of a revised US-India trade agreement, slashing punitive tariffs on Indian goods from a crippling 50% down to 18%, was met with a collective, albeit cautious, sigh of relief from boardrooms and export hubs across India. On the surface, it represents a significant diplomatic win and an economic reprieve. The deal reportedly commits India to halt purchases of discounted Russian oil—a key pillar of its inflation management strategy since 2022—and instead source energy from the US and Venezuela, while also pledging to reduce its own tariffs on American goods to zero and purchase over $500 billion in US exports. Yet, beneath the headline numbers lies a far more complex and treacherous landscape. The agreement is not just a trade pact; it is a stark embodiment of the profound institutional crisis gripping global commerce and a test of India’s strategic acumen in an era where economic policy is subjugated to the whims of executive power. The central, unsettling question, as posed by analysts like Rajat Kathuria, is not about the deal’s content, but its credibility and durability in the face of a US administration that has systematically dismantled the very foundations of rules-based trade.
The Deal: A Tactical Respite in a Strategic Storm
The specifics of the agreement reveal its character as a geopolitical bargain as much as an economic one. The US concession—removing the 25% punitive tariff (imposed in August 2025 as retaliation for India’s Russian oil imports) and lowering the baseline “reciprocal” tariff from 25% to 18%—is substantial. For Indian exporters, particularly in labor-intensive sectors like textiles, apparel, gems, and jewelry, this restores a semblance of competitiveness against rivals like Bangladesh and Vietnam, who enjoy preferential access to the US market. The relief is real and immediate; thousands of jobs and businesses on the brink can now breathe easier.
However, India’s quid pro quo is strategically significant and potentially costly. Swapping reliable, discounted Russian crude for presumably more expensive American oil (and politically volatile Venezuelan supplies) directly impacts India’s current account deficit and domestic fuel prices. The commitment to purchase over half a trillion dollars of US energy, technology, agriculture, and coal is an enormous, open-ended liability, binding future Indian governments to a specific sourcing pattern. Most tellingly, the deal was necessitated not by mutual economic optimization but by a unilateral punitive action—a pattern that defines the current US approach.
The Core Dilemma: When the Rule-Maker Breaks the Rules
The profound unease surrounding this agreement stems not from its terms but from its context. It was negotiated with a US presidency that has demonstrated a “demonstrated disdain for rules-based trade,” as Kathuria notes. This is not hyperbole but a documented reality. The post-World War II trading system, built on principles of non-discrimination (Most Favored Nation), reciprocity, and dispute settlement, has been deliberately undermined by aggressive unilateralism, where tariffs become weapons of foreign policy and trade deals are announced via social media proclamations subject to sudden reversal.
This creates a foundational crisis for economic theory and practice. As Kathuria highlights, modern growth theory rests on the bedrock principle that institutions matter. Stable rules, credible commitments, and constraints on arbitrary power reduce uncertainty, which in turn encourages the long-term, fixed investment that drives development. The “Anglo-Saxon model” was once the global exemplar of this logic. Today, its leading exponent has become its most potent disruptor. When the world’s largest economy treats trade policy as an extension of executive whim, it injects a toxin of unpredictability into the global system. For a partner like India, this means that “no deal, however grandly announced, is safe.” The experience of Elon Musk, a quintessential American entrepreneur finding himself a target, serves as a chilling reminder that proximity offers no immunity.
This environment forces a fundamental reassessment of strategy. The old playbook of deep, exclusive integration with a single, dominant market partner is now fraught with existential risk. In a world where market access can be made conditional on immediate geopolitical compliance, hedging and diversification are no longer optional tactics but essential survival strategies.
India’s Trilemma and the European Anchor
This predicament is perfectly framed by the economic trilemma Kathuria invokes, adapting the Mundell-Fleming model to geopolitics. He posits that India cannot simultaneously maintain:
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Unshackled access to strategic commodities (like discounted Russian oil),
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Complete, unallied strategic autonomy,
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Deep, preferential trade integration with the United States.
Something must give. The 50% tariff shock of 2025 was the violent manifestation of this trilemma. India’s choice to prioritize energy security and autonomy collided head-on with US demands for geopolitical alignment.
In this light, the recently concluded India-EU Free Trade Agreement (FTA) takes on monumental significance. It represents India’s strategic vote for institutional reliability. While negotiating with the EU’s 27-member bloc is famously slow, fractious, and mired in regulatory detail, it is fundamentally a process anchored in rules, legal texts, and a shared respect for binding commitments. The EU does not rewrite trade terms overnight via tweet. As Kathuria argues, the EU deal is a conscious trade-off: India accepts “regulatory friction and long negotiations in return for predictability.”
The EU FTA is not merely an alternative market; it is a hedge against US volatility. By securing deeper access to the world’s other massive high-income consumer bloc, India reduces its over-dependence on the US market. This diversification is not anti-American; it is prudently pro-Indian. It provides the country with leverage, alternative sourcing and destination options, and a buffer against future unilateral shocks from any single partner. The budgetary focus on promoting labor-intensive manufacturing, therefore, must be pursued with a dual-market strategy in mind, building supply chains that can serve both Western continents resiliently.
The Long Shadow of Daron Acemoglu and Jagdish Bhagwati
The analysis draws powerful intellectual support from two economic luminaries. The work of Daron Acemoglu (Nobel Prize, 2024) on the critical role of inclusive economic and political institutions as the bedrock of long-term prosperity is directly relevant. The current US trade posture, favoring discretionary power over stable rules, represents a move towards extractive institutional behavior in the international arena, which Acemoglu’s framework would predict is unsustainable and damaging to global growth.
Even more poignant is the prophetic warning of Jagdish Bhagwati from 1992. He cautioned the US against the very “aggressive unilateralism” it now practices, foreseeing the damage it would inflict on the global trading system. His foresight underscores that the present crisis is not an accident but the consequence of a deliberate policy choice, one that India must navigate with eyes wide open.
A Strategic Roadmap for India: Engagement without Enslavement
Given this analysis, India’s path forward requires a blend of tactical pragmatism and strategic fortitude.
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Engage, but Verify and Diversify: India must continue to engage deeply with the US—its largest single-country trading partner and a critical source of technology, investment, and geopolitical cooperation. The tariff reduction should be exploited to regain market share. However, this engagement must be devoid of illusions. Every commitment from the US must be codified in the most detailed legal text possible, though even this is no guarantee. More importantly, commercial strategies must internalize the risk of backsliding. Exporters should use the respite to upgrade quality and branding, not just ramp up volume dependent on a single, fickle market.
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Double Down on the EU and Other Partnerships: The EU relationship must be “tended, nurtured, and assiduous[ly] fostered,” as Kathuria quotes Wodehouse. Ratification and implementation of the FTA should be a top priority. Simultaneously, trade pacts with the UK, and active engagement with regional blocs in Africa, Latin America, and Southeast Asia under the “Look West” and “Act East” policies must be accelerated. Each agreement expands India’s strategic room to maneuver.
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Strengthen the Domestic Pillar: The ultimate hedge against external volatility is a robust, diversified domestic economy and a deep regional market. The Budget’s thrust on building regional economic ecosystems, connecting tier-2 and tier-3 cities through infrastructure, and fostering MSMEs is crucial. A stronger internal market makes India less susceptible to external coercion. The Production Linked Incentive (PLI) schemes and investments in critical areas like semiconductors and clean energy must be driven by a logic of strategic self-reliance and integration into multiple, competing global supply chains, not just one.
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Build Institutional Muscle: India must champion, both in word and deed, the restoration of a rules-based order. This means actively supporting and reforming the wounded World Trade Organization (WTO). It also means ensuring its own trade bureaucracy and dispute-resolution mechanisms are world-class, agile, and transparent, to credibly engage with partners who still value rules.
Conclusion: The Prudence of the Hedged Bet
The reduction of US tariffs is undeniably good news—a tactical victory that alleviates immediate pain. But to view it as the cornerstone of India’s trade future would be a grave strategic error. It is a truce with a power that has shown itself to be an unpredictable revisionist of the very system it built. The shadow of backsliding is long and real.
Therefore, India’s strategy must be one of prudent hedging. Embrace the US deal for the respite it offers, but let the memory of the 50% shock and the specter of future whims guide policy. The EU FTA and other partnerships are not just complementary; they are essential insurance policies in a world where the insurer has become the source of risk. In navigating this landscape, India must take to heart the lessons of Acemoglu’s institutions and Bhagwati’s warning. The goal is not to choose between the US and the rest, but to skillfully engage with all while building the domestic and institutional strength that ensures no single external power can hold the Indian economy hostage. In this era of quicksand commitments, the only safe footing is a broad, diversified, and resilient foundation.
Q&A Section
Q1: What are the key concessions made by India and the USA in the reported revised trade deal?
A1: The USA’s key concession is a reduction of its total tariff on Indian goods from 50% to 18%. This involves (a) removing the 25% punitive tariff imposed in August 2025, and (b) lowering the baseline reciprocal tariff from 25% to 18%. In return, India has reportedly committed to: (1) stop purchasing Russian oil, (2) source oil from the US and Venezuela instead, (3) reduce its own tariffs and non-tariff barriers on American goods “to zero,” and (4) purchase over $500 billion worth of US energy, technology, agricultural products, and coal, with an unspecified timeline.
Q2: Why does the author express deep skepticism about the durability of this US-India deal, despite its positive headline numbers?
A2: The skepticism stems from the source and context of the deal. It originates from a US administration that has consistently demonstrated a “disdain for rules-based trade,” rewriting policy by “executive fiat” and announcing deals via social media with a proven propensity for sudden reversal. The author argues that when institutions are weak and executive discretion is unchecked, no announced deal is safe from impulsive change. The very unpredictability that necessitated the deal also threatens its longevity.
Q3: How does the recently signed India-EU Free Trade Agreement (FTA) serve as a strategic counterbalance to the US deal?
A3: The EU FTA serves as a critical hedge and diversification tool. While slower and more regulatory, the EU operates within a predictable, rules-based framework. By securing deeper access to the large European market, India reduces its over-dependence on the US, gaining leverage and resilience. In the context of the “trilemma,” the EU deal represents India choosing institutional reliability and predictability, providing a stable alternative pathway for trade and investment that is less vulnerable to unilateral geopolitical shocks.
Q4: What is the “trilemma” framework the author uses to analyze India’s trade policy choices?
A4: Adapting the Mundell-Fleming model, the author posits that India faces a trilemma where it cannot simultaneously achieve all three of the following: (1) Unshackled access to strategic commodities (like cheap Russian oil), (2) Complete strategic autonomy (freedom from alignment pressure), and (3) Deep trade integration with the United States. The 2025 tariff shock proved that pursuing (1) and (2) conflicted with (3). The new deal forces a concession on (1), while the EU FTA helps mitigate over-reliance on (3).
Q5: According to the analysis, what should be the cornerstone of India’s long-term economic strategy in this volatile environment?
A5: The cornerstone must be prudent hedging and institutional strengthening. This involves: (a) Engaging with the US pragmatically but without illusions, exploiting opportunities while guarding against backsliding. (b) Actively deepening relationships with other major economies like the EU, UK, and regional blocs to diversify market access and supply chains. (c) Fortifying the domestic economy through infrastructure, MSME support, and PLI schemes to build a resilient internal market. (d) Championing a rules-based global order and building India’s own institutional capacity to credibly engage within it. Diversification is the essential strategy for sovereignty in an age of unpredictability.
