Delay in the India-U.S. trade deal raises long-term risks for exports and investment

Traders Union
All News
Financial News
Delay in the India-U.S. trade deal

Highlights

The 10 percent tariff remains in force due to delays in U.S.-India trade talks, increasing long-term risks to India’s exports and investment.
Indian exports to the U.S. rose 6.2 percent to $42.79 billion during April-August 2024, although foreign portfolio investors recorded net sales of ₹2.3 lakh crore.
The Lindsey O Graham Sanctioning Russia and Iran Act, passed on September 18, raised the risk of additional tariffs of up to 100 percent on India, potentially having a severe impact on the trade environment.

This article was translated from the original. Read the original version by our correspondent here.

Current tariff framework and status of negotiations

According to Forbes India, Indian goods currently face a 10 percent tariff in the U.S., in addition to sector-specific most favoured nation, MFN, duties. The 10 percent tariff was imposed in July under Section 301 of the Trade Act after the U.S. raised concerns over forced labour.

This rate is significantly lower than a year ago. Last year, India faced a 25 percent reciprocal tariff, which was later raised to 50 percent after an additional 25 percent was added over purchases of Russian oil. On February 6, the two countries agreed on a framework for an interim deal, bringing the rate down to 18 percent, but on February 20, the U.S. Supreme Court ruled unconstitutional the tariffs imposed by President Donald Trump under the International Emergency Economic Powers Act.

Despite this, exports to the U.S.—India’s largest export market, accounting for 19.8 percent of total outbound shipments—are rising. According to Commerce Ministry data, exports to the U.S. increased 6.2 percent to $42.79 billion during April-August this year, while total merchandise exports rose 17.9 percent to $215.91 billion.

Rajani Sinha, chief economist at CareEdge Ratings, says the key issue is not just the timing of the deal, but whether the delay leaves India at a greater tariff disadvantage for longer than competing exporters. Madan Sabnavis, chief economist at Bank of Baroda, also believes the absence of a deal is a concern, although its exact impact is difficult to quantify because services exports partly offset it.

Finance Minister Nirmala Sitharaman says the negotiations have reached a plateau beyond which give and take could become very difficult. Her remarks followed a statement by U.S. Trade Representative Jamieson Greer, who said talks are nearing a conclusion but a deal is not imminent.

Implications for markets, the rupee and exporters

The immediate risk could emerge through financial markets and investor sentiment. According to Sinha, if the delay drags on and India is seen as lagging behind other emerging market exporters, pressure on portfolio flows and the rupee could increase, while higher crude prices, foreign outflows and a strong dollar are already weighing on the currency.

According to NSDL data, foreign portfolio investors have recorded net sales of ₹2.3 lakh crore so far this calendar year. The rupee closed at 96.78 per dollar on Thursday, close to its all-time low of 96.96.

Export-oriented companies may also become more cautious about capacity expansion in India if access to the U.S. market remains persistently uncertain. Ajay Srivastava, founder of the Global Trade Research Initiative, GTRI, says uncertainty is already complicating pricing and contracts, as U.S. buyers may take a more cautious approach to long-term agreements.

A major source of risk is the Lindsey O Graham Sanctioning Russia and Iran Act, signed by Trump on September 18, which allows for additional tariffs of up to 100 percent on major buyers of Russian energy, including India. Sinha says that if materially higher tariffs are imposed under this law, it would mark a major shift in the trade environment and could have far more serious consequences for Indian exports, investment and growth.

RBI Governor Sanjay Malhotra considers it premature to make a final assessment of the impact, as it is still unclear which sectors will be affected by the tariffs and to what extent. According to him, the impact will be negative, but India has also diversified its export markets, while other trade agreements already in force and in the pipeline could partly mitigate the effect of additional tariffs.

Franziska Ohnsorge, chief economist for Asia at the World Bank Group, points in the same direction. According to her, India’s recent agreements with the EU, UK and other partners nearly double the share of global GDP to which India has preferential access to around 30 percent, and an agreement with the U.S. would increase it further. Still, Sinha says India has sufficient capacity to diversify its trade relationships, but the U.S. is such an important market that it cannot be replaced quickly.

Our previous report discussed India-U.S. trade talks reaching a ‘plateau’ and the difficulty of securing further concessions. Citing Finance Minister Nirmala Sitharaman, it noted that issues such as tariff pressure, trade imbalances and investment protection are hindering the finalization of a deal, while also highlighting the India-EU agreement as a comparative model.

This material may contain third-party opinions, none of the data and information on this webpage constitutes investment advice according to our Disclaimer. While we adhere to strict Editorial Integrity, this post may contain references to products from our partners.