Wednesday’s decision followed the failure of both sides to strike an interim trade deal before the August 1 deadline for countries to wrap up trade agreements with the US. The Trump administration announced unprecedented reciprocal tariffs against most countries on April 2 but has since paused them to facilitate bilateral deals.
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New Delhi hasn’t immediately responded or reacted to the move, while trade analysts felt a climbdown by Trump was very much possible, as had happened in the case of the European Union, and to an extent, with China.
During negotiations with Indian officials, Washington has been steadfast on zero-duty access to India for nearly all tariff lines, a line it adopted in regard to major trading partners like the European Union (EU) and Japan also, with reasonable success.
On its part, New Delhi, which had seemed to accommodate the US interests to an extent by lowering some of the tariffs over the last couple of years, apparently hardened its stance in the latest rounds of talks, guarding vulnerable elements of its economy, especially farm and dairy sectors.
India became the first country to face a trade penalty by the US after the Trump administration unleashed a trade war weeks after it assumed office.
“They (India) have always bought a vast majority of their military equipment from Russia, and are Russia’s largest buyer of energy, along with China, at a time when everyone wants Russia to stop the killing in Ukraine— All things not good,” Trump said.
This clearly indicated a souring of bilateral economic ties between India and the US. Washington may have the intent to impart a sense of urgency for India to mitigate the new trade barriers by concluding a bilateral trade agreement (BTA) at the earliest; an earlier plan, authorised by prime minister Narendra Modi and Trump was to firm up the first tranche of the pact by the fall of this year.
The cumulative effect of the new imposts and how they would compare with the extra US levies on several of India’s key competitors is yet to be fully ascertained, but with such tariffs coming in, India is likely to be placed worse than at least some of its key competitors. It may still be able to keep the export pace in some sectors like textiles and garments, where it enjoys a high degree of relative advantage with some South Asian competitors, but would lose out in other areas including marine products.
New Delhi has long enjoyed a trade surplus with the world’s largest economy, with net forex gain of $ 41.4 billion from bilateral goods trade in FY25, a year in which its merchandise shipments barely grew, but shipments to the US rose by nearly 12%. Services exports to the US stood at $48 billion in FY25.
While the European Union (15%), Vietnam (20%) and Indonesia (19%) now will have relative advantage in tariffs to the US, the flurry of decisions expected to be announced by Trump after the August 1 deadline will bring more clarity on where India stands in relative terms.
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A former trade official with the Indian government said that by going ahead with the tariffs, Trump has freed India from the pressure of having to offer some “onerous concessions” in return for slightly lower tariffs. In the absence of the deal India retains freedom to impose import duties on American imports and not change its regulatory regime to suit the US-based companies, he said, requesting anonymity. Washington would have to pay a heavy price in India, for example, opts to tax the Big Tech with a new version of the so-called Google tax (equalisation levies). India has withdrawn this impost in two steps taken over the past year – one in August 2024 and another in Budget FY26 – , in the hope of a multilateral deal on taxation of digital economy, but the relevant pact unravelled after Trump abruptly withdrew from it.
The Deal
In the deals the US has entered into so far, it has got duty free access to the markets of the partners and promises to purchase aircraft, energy and agriculture products in large quantities. In return the US has offered to cut duties to just 19% in case of Indonesia, 15% for the EU, 10% for the UK, and 20% for Vietnam. The rates of reciprocal tariffs for Bangladesh and Cambodia were 35% and 36% respectively, while no no deals have been clinched with the two countries so far to mitigate the levies.
“The tariff announced by Trump is going to be a challenge in the context that some of our competitors might face lower duties. India will have to remain patient and continue negotiations on the BTA,” former diplomat and senior fellow at Delhi Policy Group V S Seshadri said.
“We need to see the tariff imposed on our competitors. If they are higher we are not much at a disadvantage. Also the negotiations may speed up and Trump may get some defence deals,” professor at Indian Council of Research in International Economic Relations (ICRIER) Arpita Mukherjee said.
Ajay Sahai, director general of Federation of Indian Export Organisations (FIEO) said that the 25% standalone tariffs could be absorbed by the exporters and the buyers for a few months, till the first tranche of the BTA is finalised. He, however, said that the penalty would add a lot of uncertainty, as it could be 10% or more, which could make all the calculations of exporters go haywire. “While adjustments can be made in tariffs, India will find it difficult to shut down defence and oil purchases from Russia,” a trade official said.
“If the additional tariff and penalty are sustained, they could directly affect key sectors such as marine products, pharmaceuticals, textiles, leather, and automobiles, where bilateral trade has been especially robust,” Trade Policy Leader at EY India Agneshwar Sen said.
Aditi Nayar, chief economist at ICRA said: “When the US had initially imposed tariffs, we had lowered our forecast of India’s GDP expansion to 6.2% for FY26, presuming a tepid rise in exports and a delay in private capex. The tariff (and penalty) now proposed by the US is higher than what we had anticipated, and is therefore likely to pose a headwind to India’s GDP growth. The extent of the downside will depend on the size of the penalties imposed.”