Navigating US India Trade Relations Amid Global Volatility
Why in News?
Recently, the United States imposed 25% tariffs on several categories of Indian exports, including critical sectors like textiles, chemicals, pharmaceuticals, and auto components. This move has intensified trade tensions and has brought Indo-US trade relations under renewed focus, especially at a time when global economic uncertainty, currency volatility, and geopolitical instability are already reshaping policy frameworks. The development necessitates a closer look at the strategic, economic, and diplomatic implications of such tariffs and the broader trajectory of India-US economic ties.
Introduction
The India-US trade relationship, anchored in shared democratic values and strategic convergence, has entered a more complex and challenging phase. The imposition of 25% tariffs by the US on Indian exports underscores growing friction in trade negotiations, even as both nations continue to cooperate on multiple fronts, including defense, technology, and energy. This new phase of economic diplomacy comes amidst increasing global volatility, weakening currencies, and shrinking global capital flows, making it imperative to evaluate India’s options and responses carefully.
Key Issues
1. Impact of US Tariffs on Indian Exports
The newly imposed tariffs cover over 2% of India’s GDP in exports to the US. Critical sectors like textiles, chemicals, pharmaceuticals, and auto components are likely to bear the brunt, with an estimated export earning loss of up to $30 billion. The impact could further ripple through supply chains, employment generation, and GDP in the short term. While India has a strong domestic consumption base that provides some insulation, such sudden trade barriers stress export-heavy sectors disproportionately.
2. US Pressure Points: Agriculture, Energy, and Defense
India’s cautious stance on agricultural and dairy imports has long been a sticking point for Washington. Moreover, a growing discomfort in the US over India’s increasing energy and defense ties with Russia has added layers of complexity. Notably, India expanded crude oil imports from Russia from around 2% of total imports in FY22 to 36% in FY25, mostly due to wartime discounts. While this strategic energy diversification reduces India’s dependency on any single source, it adds friction to India-US ties, especially when viewed through Washington’s geopolitical lens.
3. Global Economic Volatility and Currency Pressure
The imposition of tariffs coincides with increased global economic uncertainty. July saw foreign portfolio investors pull out more than $1.4 billion from Indian markets. The Indian Rupee weakened by around 2%, ranking among the worst-performing currencies globally that month. A depreciating currency not only increases the cost of imported inflation but also raises the cost of external debt and complicates monetary policymaking.
4. RBI’s Delicate Balancing Act
Inflation in India is expected to hover around 3% in FY26, but the Reserve Bank of India (RBI) must walk a tightrope. It has to weigh global interest rate trajectories, capital flows, and exchange rate dynamics while supporting domestic economic growth. In such times, transparency, consistency, and prudence in monetary policy are more vital than ever.
5. Procurement and Geopolitical Tensions
The US has increasingly expressed dissatisfaction with India’s defense procurement from non-Western countries, particularly Russia. Yet, India has adopted a pragmatic approach, balancing its procurement across geographies. Recent expansions in defense imports from the US indicate India’s willingness to address such concerns while preserving its strategic autonomy.
Alternative Approaches
1. Trade Diversification and Bilateral Agreements
In response to narrowing US market access, India has stepped up its efforts to diversify exports toward other major economies. India’s trade engagements with the EU, UK, Japan, and ASEAN are gaining momentum, with several bilateral and regional free trade agreements under negotiation. This move is part of a broader policy to de-risk over-reliance on a few large markets and to ensure supply chain resilience.
2. Leveraging Strategic Partnerships
India has increasingly aligned with like-minded countries to create alternative trade and technology frameworks. The Quad (India, US, Japan, Australia) and the IPEF (Indo-Pacific Economic Framework) are key examples. While these partnerships are not trade agreements in the traditional sense, they help create trust and frameworks around data governance, digital trade, and standards, which are critical to the future economy.
3. Improving Domestic Competitiveness
India’s government has launched initiatives like Production-Linked Incentive (PLI) schemes to boost domestic manufacturing and exports. These initiatives aim to make Indian industry more competitive globally and attract foreign direct investment (FDI), especially in high-tech sectors like semiconductors, pharmaceuticals, and electronics.
Challenges and the Way Forward
1. Navigating US Protectionism
The current US administration’s push to narrow its current account deficit through selective protectionism and reduced import dependence has had a direct bearing on India. While India respects the strategic need for self-reliance, the US must acknowledge that its economic diplomacy must remain rule-based and globally aligned. Any “mini-deal” with India must go beyond symbolic tariff revisions to address structural irritants like agricultural market access, technology transfers, and regulatory harmonization.
2. Sustaining Domestic Resilience
India’s insulation from short-term global shocks is supported by strong domestic fundamentals, including high savings, a large middle class, and consumption-driven growth. However, rising commodity prices, rupee depreciation, and external capital flight pose significant risks. Maintaining fiscal discipline and monetary flexibility will be essential to navigating upcoming global headwinds.
3. Strategic Alignment Without Compromise
India’s dependence on Russian oil and defense technology is a geopolitical tightrope. While such dependencies are economically favorable in the short term, India must carefully recalibrate to avoid being caught in the crossfire of US-led sanctions or strategic realignments. Smart diplomacy, technological partnerships, and domestic capacity-building must be used to reduce such vulnerabilities over the long run.
Conclusion
The recent escalation in US-India trade tensions reflects broader shifts in global economic diplomacy. While short-term shocks are inevitable—whether due to tariffs, currency volatility, or capital flight—India’s long-term trajectory remains resilient. Anchored in robust macroeconomic fundamentals, diversification of trade partnerships, and smart policy interventions, India is well-placed to weather these storms.
Strategically, India must continue to assert its role as a key global economic player—not merely as a balancing force between competing powers, but as a nation defining its own economic destiny. The evolving relationship with the US, despite its current strains, will remain pivotal. A stable, rule-based, and equitable economic partnership must be the shared goal.
Five Questions & Answers
Q1: What triggered the recent US-India trade tension?
A: The US imposed 25% tariffs on several Indian export sectors including textiles, pharmaceuticals, and auto components. This move has strained trade relations, even as India continues to diversify its energy and defense imports, particularly from Russia.
Q2: How significant are Indian exports to the US in terms of GDP?
A: Indian exports to the US constitute just over 2% of GDP. Tariffs on these exports could potentially lead to losses of up to $30 billion in export earnings and significantly impact employment and supply chains.
Q3: How is India responding to this economic and geopolitical challenge?
A: India is diversifying its trade partners, expanding imports from the US in strategic sectors, improving domestic competitiveness through PLI schemes, and actively negotiating FTAs with other global partners.
Q4: What role does the RBI play in managing the fallout of global volatility?
A: The RBI must balance interest rates, capital flows, and currency management while ensuring stable inflation. It plays a central role in stabilizing the Indian economy during periods of external economic stress.
Q5: Can India’s domestic economy withstand global shocks like this?
A: Yes, to a large extent. India has strong macroeconomic fundamentals, a consumption-driven economy, and increasing manufacturing self-reliance. However, sustained policy consistency and economic diplomacy are essential for long-term stability.
