Don’t Expect Economic Liberalism From US – Even Now

The Democrats’ sweep of both the House and the Senate in the midterms has weakened Trump’s legislative position for the rest of his term. Many experts, however, feel that it does not remove his executive authority over tariffs, sanctions, and trade negotiations.

For India, this may mean a larger negotiating room with lesser risk of sudden tariff escalation. But will this mean a fundamental reset in US–India economic relations? Perhaps not. 

Four Pillars

India-US economic relations have four major pillars: Bilateral trade, including tariff issues and the fate of the bilateral trade agreement under negotiation; export of services, related visas, and technology; impact of war on India’s energy imports, especially oil and gas, and Russia-related sanctions; and capital flows. So, it’s not business as usual - with both sides staying in an asymmetric position - that India finds itself in today.

Normally, in the midterms, the President’s party loses seats, but this time the shift has been massive, impacting the Senate, Congress, gubernatorial, and other elected positions, even in states that were generally considered Republican.

That might encourage other leaders within the party and weaken the President’s executive authority, creating leverage for India. At the same time let us not delude ourselves that a Congress under Democrats would be promoting economic liberalism.

Economic Nationalism 

From the victory speeches of the candidates, protectionism disguised as economic nationalism seem to be the creed of present-day economic thought in the US.

A Democrat dominated Congress is likely to increase pressure on President Trump to wind down or contain the Iran conflict, as also opinion within Republicans, as we have seen from the statement of J.D. Vance. Markets interpret this as improving the odds that supplies through the Strait of Hormuz move towards normalisation.

Immediate benefits to us would accrue on oil and gas. Prior to the conflict, roughly 40% of India’s oil imports, 60% of liquefied natural gas (LNG) imports, and 90% of liquefied petroleum gas (LPG) imports moved through West Asia and the Strait of Hormuz. It was cheap as transportation cost was low, but it also created a vulnerability.

If the conflict eases, India could benefit through lower crude prices, lower tanker freight. This would obviously reduce current account deficit and have a benign impact on inflation. Beneficial side effects would be easier flights over the Middle East and safer movement of sea freight.

However, a Bill empowering sanctioning countries that import crude from Russia has already been passed by the Congress and has received Presidential assent. Any move by India to diversify its supply sources by buying sizeable amounts from Russia could meet with sanctions. In any case, a good part of the supply chain operating from Russia is under sanction.

An added incentive for the US would be to palm off Venezuelan oil on which they have control. That is notwithstanding higher tanker transportation costs for India. The only way out for India is to improve its domestic production.

Even improvement on the margins would help us to significantly cut down foreign exchange outgo and protect our reserves. That would also give a fillip to Indian oil and its ancillary industry and bring down risk to energy supplies.

So, oil supply risk would fall if Washington de-escalates. Russia related sanctions risk would rise. India’s best hedge is to diversify sourcing, build adequate strategic reserves, and concentrate upon improving domestic production.

Trade Agreement, Services Export

The bilateral trade agreement along with the export of services and labour mobility is the central economic issue. Though the detailed framework is not known, but the Joint statement/memorandum issued in February 2026 reveals that proposed framework is asymmetric.

The US would retain its regular MFN tariffs, while India would be required to cut or eliminate MFN duties on many industrial and agricultural products. India could also remain exposed to additional US tariffs, as certain legislations like Super (Section) 301, Legislation on Oil Trade with Russia expose Indian products to punitive tariffs.

Even at present, India faces its normal MFN tariff plus a 10% additional tariff. Trump’s political weakness increases his incentive to secure a visible trade win before the 2028 election cycle.

However, if India opens market access to some US goods, it should insist on greater labour mobility. The US has restricted that through executive action; quite a few of them have been stayed by the US courts as well. Else, going by the present trajectory, net migration would turn negative. On this issue, the narrative in the press and of policymakers is that of glee. We forget that in FY2025-26, net private transfers to India amounted to US$ 145 billion. The US share there is 28%, roughly US$ 40 billion.

Those remitting money home are not big money NRIs, but young men and women from lower and upper middle class families who saw education as a means to uplift themselves and their families. That is an important facet of our demographic dividend. I do not advocate illegal migration to the US. It’s for them to fix, and they have largely done it.

Defence Purchases

Indian defence purchases revolve around co-production of engine for AMCA/Tejas, buying Hi-Tech Drones, P-81 surveillance aircrafts, and co-production of javelin anti-tank missiles. None of these are rocket science for India, so we have a leverage here.

On capital flows, bond yields in the US being high and the Indian bond market being shallow, I do not see immediate prospects of large private equity/venture capital funds flowing into India as before. But that part is for the US to fix by reducing inflation and reducing fiscal deficit. India should, however, deepen its bond market so that capital flows see an alternate asset class.

This election witnessed a strong resentment against data centres. US companies may look to base them in India. We are generally an arid country with electricity supplies stretched. So, the caveat is that locating data centres in India should not be seen as a sop. We may build our own based on our own requirements.

The Indian government and its negotiators have, recently, been successful in buying time in negotiations on trade and defence. Now, with a nominally powerful, but otherwise weakened Presidency in the US, every country would be jockeying for a better deal. We should not box ourselves into a permanently weak position on the central issue of trade. It needs to be bundled with labour mobility worked through the visa process.

An additional punitive tariff of 10% has to go a priori, as also use of the multilateral trade dispute settlement mechanism. Asymmetry as reflected in the joint statement has to lend itself to an MFN-based equitable tariff regime, that is fair to both sides. We have levers in the form of defence purchase, oil and market access.

Simultaneously, Indian manufacturers will have to explore markets other than the US to reduce vulnerability. We need to hunker down for long, patient, and hard-nosed bargaining now, without expecting too much from the noise coming from shores afar.