India-US Trade Deal: New Delhi Gets Level-Playing Field, But Tariffs Far Higher Than Pre-Trump Era

Indian exporters have heaved a sigh of relief with the Donald Trump administration now reducing tariffs to 18% from 50% on Indian goods entering the American market. The bilateral trade agreement has essentially provided a level-playing field to India, placing it more or less in line with its Asian peers, while providing a competitive edge to the country’s exporters.

However, the quantum is still way too high for real celebrations.

In the pre-Trump era, US tariffs, on average, stood at about 2%.

With the trade deal in place, the effective reciprocal tariff of 25% announced in April will now stand at 18%, and the additional 25% being levied as a penalty for India’s imports of Russian oil has been removed. India has agreed to reduce the tariff to zero.

Fine Print Still Unclear

The fine print of the trade deal is unclear, even as Trump announced that India has committed to increasing the purchase of American goods, in addition to buying more than $500 billion worth of US energy, including coal, along with technology, agricultural, and other products. He also stated that India has agreed to stop buying Russian oil and replace it with oil from Venezuela and the US.

The reduction in tariff from a whopping 50% will undoubtedly open up the American market to the Indians, but exporters indicated that they prefer to tread carefully. The move will also help the micro, small, and medium enterprises (MSMEs). More than 1.7 lakh MSMEs are engaged in exports.

The India–US trade deal, cutting reciprocal tariffs on Indian exports from 50% to 18%, is a positive development, particularly for MSME-led sectors such as textiles and apparel, gems and jewellery, and leather, which were hardest hit by recent tariff hikes

— Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat

He added that the move reinforces India’s position as a reliable long-term sourcing partner for the US, supporting order recovery and restoring buyer confidence.

Tariffs On Other Competing Economies

The US has imposed a 50% tariff on Brazil, 40% on Myanmar and Laos. China and South Africa face about 37% and 30% tariffs, respectively. Other Asian economies – Vietnam and Bangladesh, face a 20% tariff.

“When our competition is on the same playing field, we can win; we have every opportunity to win. The only person suffering is the American consumer who has to pay anywhere between 18% and 35% more for consuming the goods than what they paid earlier,” Rahul Ahluwalia, Founder-Director of the Foundation for Economic Development, who was formerly associated with NITI Aayog, told The Secretariat.

As of now, with the reduction in tariff, it seems that the ambitious target of touching the $500 billion mark in bilateral trade by 2030 is set to be achieved.

Can India’s Slashing Of Tariff To Zero For US Imports Benefit?

“We don't lose. It's the American customer that loses,” Ahluwalia said. If tariffs for input goods and raw materials are kept at zero, it will bolster the Indian economy — manufacturers as well as consumers.

Trade economists say that the best thing to do with your tariffs is to unilaterally move them to zero

— Rahul Ahluwalia, Founder-Director, Foundation for Economic Development

The trade deal will definitely be a sentiment booster, and the rupee, which has been falling steadily in the last few months, is expected to be bolstered.

The Indian rupee registered its maximum single-day gains since December 18, 2018.

Impact On Indian Rupee

A report published by Emkay Financial Services noted that the Indian currency “has borne a large part of the tariff overhang” with a negative feedback loop hammering rates markets, equities, and eventually policymaking. It added that some of this noise could subside, and possibly lead to a reversal of capital inflows. The rupee, which hit a record low of 92 against the greenback, recovered to touch a level of around 90.4.

Analysts said that the rupee is likely to strengthen further. Though the steady depreciation of the rupee became a cause for concern to the authorities, it largely helped in arresting the losses of the exporters.