When Indian Prime Minister Narendra Modi met US President Donald J. Trump at the White House on February 13, 2025, they launched a new initiative – the “U.S.-India COMPACT (Catalysing Opportunities for Military Partnership, Accelerated Commerce & Technology) for the 21st Century.” While the parties clearly signalled their desire to continue building out their defence and technology partnerships, they also recognised that Delhi had to address Washington’s concerns about India’s high trade tariffs and the persistent US trade deficit with India to ensure the overall health of the relationship. It is therefore in the interests of both countries to reach an agreement soon on the first phase of a trade deal, perhaps on terms tilting toward US demands now, but with possible adjustments down the road further addressing Indian concerns.
India’s response to change
Trump and Modi had developed a close relationship during the first Trump administration. Seeking to capitalise on this goodwill, the Indians have taken a forward-leaning approach to trade issues with the new Trump administration. External Affairs Minister S. Jaishankar travelled to Washington in late December 2024 for an initial meeting with incoming National Security Advisor Michael Waltz to start a dialogue with the new administration. Jaishankar followed this with his attendance at the Trump Inauguration and a meeting with Secretary of State Marco Rubio.
The Indians sought an early visit to Washington by the Prime Minister to advance bilateral ties. Shortly before Modi’s mid-February 2025 trip to Washington, India unveiled its 2025 Union Budget, with elements seemingly designed to try to avoid the US imposition of punitive trade tariffs. That Budget featured unilateral tariff cuts on several items important to America, such as high-end motorcycles, luxury cars, and some electronic goods.
At the Trump-Modi meeting on February 13, the Prime Minister announced some additional tariff cuts as the two leaders launched a new initiative – Mission 500. That initiative aimed to more than double bilateral trade in goods and services from $210 billion in 2024 to $500 billion by 2030. To do this, they announced plans to negotiate the first tranche of a “mutually beneficial, multi-sector Bilateral Trade Agreement (BTA) by fall of 2025.” They further agreed to implement “new, fair-trade terms” in the BTA.
All these steps indicated India’s willingness to make substantial tariff cuts. Nevertheless, that same day, Trump announced a “Fair and Reciprocal Plan” on trade. When asked about this plan at his press conference with Modi, Trump stated that India is “about the highest tariffed nation anywhere in the world.”
The rush before July
Since then, Indian and US trade delegations have travelled to each other’s capital to hammer out the first phase of a trade deal. The Indians reportedly put a broad range of tariff cuts on the table at the outset of negotiations, perhaps hoping to avoid the “reciprocal tariffs” that Trump planned to announce on April 2. However, when the White House issued its list of 60 countries that would have new tariffs of more than 10 per cent, it included a 26 per cent rate for India.
India, therefore, had not escaped the US plan for reciprocal tariffs to go into effect one week later, on April 9. But prior to that time, the President issued an Executive Order suspending all reciprocal tariffs (except on China) for a period of 90 days—likely because of sharply declining financial markets, sliding bond prices, and the fact that many countries had responded to the threat of new tariffs by reaching out to the US to discuss trade deals.
This suspension has put the burden on countries to try to be in the initial group of those concluding trade agreements with the US, thereby hoping to avoid the imposition of reciprocal tariffs on July 9. India is near the top of the list of countries likely to conclude such an agreement because of Modi’s early engagement with Trump, their joint aspiration to conclude the first tranche of a BTA by the fall, and the ongoing talks between trade officials. But after several rounds of negotiations, the two countries have still not sealed the deal. Although the Indians have reportedly put on the table a range of tariff cuts, including on industrial goods, there is US pressure for some cuts in the sensitive area of agricultural products, as well as the need for India to reduce some non-tariff barriers such as quality control requirements, and alter its strict data localisation rules.
In the meantime, the Trump administration has announced that it has concluded a term sheet for its first trade deal—that with the UK. Washington has also agreed with Beijing to substantially lower, for a period of 90 days, US tariffs on Chinese goods from 145 per cent to 30 per cent, and Chinese tariffs on articles from the US from 125 per cent to 10 per cent. While both these agreements are thin on substantive details, their signings provide urgency for the US and India to reach an agreement.
India may be reluctant to accept some US demands, seeking instead to negotiate what it views as a more balanced and mutually beneficial deal. But it behoves Delhi to try to reach an agreement relatively soon, and certainly before July 9, even on what it may view as less-than-ideal terms. The US regards the trade relationship as out of balance, and it would be a risky strategy for India to hold out for a deal it may not get, let other countries cut deals ahead of it, or lose momentum in the bilateral partnership. Instead, unlike most other countries, if India agrees now to the first phase of an agreement, it will likely get a second bite at the apple in the late fall when Trump is scheduled to visit Delhi for a Quad summit
For the US, India is a key partner in the Indo-Pacific and an integral member of the Quad grouping (Australia, India, Japan, and the US) that serves as a regional counterweight to China. A US-India trade deal would enhance the strategic dimension of their bilateral relationship. India is also an important contributor to the US technology sector, with complementary capabilities for joint development and production of critical and emerging technology products. In addition, India hosts approximately 2,000 US companies and can be a significant purchaser of US energy and defence equipment. In short, for a Trump administration interested in demonstrating that it can conclude important trade deals with significant countries, India is a prime candidate.
The benefits of a deal for India
For India, there are several compelling reasons for being in the initial group of countries that conclude an agreement with the US. First, the US is India’s largest trading partner for goods and services. Delhi should want to lock in the benefits of America as an export market by concluding a deal. This is especially the case because India has world-class companies that can compete successfully in the US if tariffs are not prohibitively high.
Second, Delhi should want to benefit from the relatively higher US tariffs currently applied to Chinese goods and the comparatively higher proposed reciprocal tariffs for other Asian countries, such as Vietnam, Bangladesh, and Indonesia, by getting its own US tariff level as low as possible. Moreover, if one of India’s concerns is not to have to lower its tariff rates for Chinese products while lowering them for American goods, signing a BTA with the US is the best way forward, as the WTO permits such preferential agreements as an exception to its “most-favoured nation” principle.
Third, a BTA with the US would send a strong positive signal to the US trade and investment community that India welcomes and is open for business. This is critical for India to attract foreign investment in the manufacturing sector and promote itself as an alternative supply chain hub to China, which is one of India’s strategic priorities.
Fourth, the government of India now seems to recognise that expanding trade relations with the West through bilateral agreements is central to its economic growth, as it signed a deal with the European Free Trade Association last year and recently concluded a deal with the UK. India is currently negotiating an agreement with the European Union, in addition to its ongoing discussions with the US. To the degree that Delhi needs to make some politically difficult concessions to conclude such deals, especially with America, it can blame Washington for reforms that, while perhaps controversial domestically, may be beneficial in the long run for the Indian economy.
Finally, Modi—more so than most elected leaders—seems to have the political capital, based on his widespread popularity and the lack of a forceful opposition party, to withstand any domestic criticism that inevitably comes with reaching a trade agreement that requires some difficult concessions.
Sensitive decisions ahead
The deal that Trump announced with the UK—a country with which the US has a trade surplus—might provide some hints as to what Washington may expect from Delhi. For example, the Americans received British concessions in the politically sensitive agricultural sector. The parties also briefly addressed non-tariff barriers, digital trade, and intellectual property rights. However, despite the agreement, the US largely kept in place the baseline reciprocal tariff rate of 10 per cent on UK products. This portends that Washington will demand some agricultural concessions from Delhi that may be politically difficult, will want to address several non-tariff issues, and will only agree to reduce the announced 26 per cent reciprocal tariff to 10 per cent at this time.
In recent weeks, however, several developments have potentially complicated the ongoing US-India negotiations. For example, following four days of fighting between India and Pakistan (after India struck multiple targets in Pakistan in response to the terrorist attack in Pahalgam), Trump claimed to have brokered a ceasefire between the two countries. In doing so, US officials asserted that the prospect of increased trade with America had encouraged each side to agree to the ceasefire.
Although India’s Ministry of External Affairs acknowledged conversations between US and Indian leaders, they rejected Washington’s claim of having mediated the ceasefire and insisted that the issue of trade was never raised. But this verbal sparring did not derail trade negotiations.
Later, on May 28, the US Court of International Trade ruled that Trump lacked authority to impose sweeping reciprocal tariffs under the International Emergency Economic Powers Act, the statute on which he had relied. This raised questions as to the long-term viability of those tariffs, even though an appellate court temporarily paused the effects of the ruling.
While the validity of these tariffs may ultimately be decided by the US Supreme Court, the judicial actions could possibly take pressure off countries to conclude trade deals with the US or at least alter their negotiating tactics. To date, however, there is no indication that other countries are going into a holding pattern or changing their posture in talks with America—and India should not do so either.
US officials have vowed, if necessary, to rely on other statutes to impose reciprocal tariffs. Moreover, the US has additional levers in the bilateral relationship—including those related to defence and technology cooperation—to persuade India to move forward with a trade deal.
Of course, India may be reluctant to accept some US demands, seeking instead to negotiate what it views as a more balanced and mutually beneficial deal. But it behoves Delhi to try to reach an agreement relatively soon, and certainly before July 9, even on what it may view as less-than-ideal terms. The US regards the trade relationship as out of balance, and it would be a risky strategy for India to hold out for a deal it may not get, let other countries cut deals ahead of it, or lose momentum in the bilateral partnership. Instead, unlike most other countries, if India agrees now to the first phase of an agreement, it will likely get a second bite at the apple in the late fall when Trump is scheduled to visit Delhi for a Quad summit.
Without a deal now, it is not even clear that Trump would travel to India. But with a deal by July 9, Trump may well be inclined to agree to other trade terms more favourable to India as one of the “deliverables” of his visit in the fall.
In sum, now should not be the time for India to insist on incremental changes by each side or be a reluctant partner in its trade negotiations with the US. Rather, Delhi may want to offer significant concessions now that would clearly seal an initial deal with the prospect of gaining goodwill with Trump and receiving some payback later in the year in the next tranche of a BTA. If the parties are ultimately able to conclude a BTA, it would be a historic event in US-India relations.
