Trump-Modi: More Tariff Cuts, More Oil, Defence Purchases

India is looking at cutting import tariffs on multiple product lines, the number of which could vary between a dozen to a score, and include electronics, medical equipment, chemicals and luxury cars.

Call it the Trump effect or term it as trade rationalisation, officials say that this is on the cards as India's way of managing the complex Indo-US relationship and gaining advantages that may go beyond trade. President Trump has in the past threatened that he would slap higher tariffs on all countries which do not open up their doors to more US trade and weaponised trade measures to gain concessions from Canada and Mexico in his first few weeks in office.

At stake is not only President Trump's threat of using tariffs as a lever to prise open new markets for American exports but also the complex relationship where India and the US cooperate in managing India's Asian and Indian Ocean neighbourhood and the rise of China. The summit between the two leaders may prove to be crucial for both Washington and New Delhi in the times ahead. 

This is the first part of a two-part series delving into the mid-week Trump-Modi summit. 

More Levy Cuts In Offing?

Officials say that India may also do away with a levy — the Agriculture Infrastructure Development Cess — imposed on a number of imports, including material building blocs for semiconductors, heavy machinery, solar cells and luxury cars and motorcycles.

US diplomats, who had earlier been involved in an aborted mini-trade deal that had been negotiated with India during President Trump’s first term, say the negotiations will be “tough” and there will be demands for reducing tariffs on farm produce, wine, liquor and “certainly luxury automobile manufactures”. 

They also said that if a mini-trade deal is negotiated, it would follow the “structure adopted in the US-Japan Trade Agreement”, which came into force five years back. US officials who refused to be named, told The Secretariat that a “big free trade agreement with India is unlikely.

What can happen is a smaller pact modelled on the USJTA, which was signed during the first Trump administration. It's not a free trade pact but buys into that with reciprocal duty adjustments. 

India has already slashed its top-end basic tariff rate which stood at 125 per cent to 70 per cent and its average tariff rate to 11 per cent in the Union Budget, announced at the beginning of this month.

A large number of life-saving drugs were also exempted from tariff, a move which should please big US pharmaceutical companies who funded the Trump campaign. Similarly, machinery needed for EV manufacturing and mobile phone battery factories, have also been exempted from customs duties.

The cuts announced in the annual Budget is expected to help Harley Davidson sell its iconic motorcycles at a lower price in the vast Indian market, among other things. However, US diplomats felt the rate may need “to be trimmed down further to be acceptable to the new Trump administration”.

Donald Trump, who is viewed as the “great disruptor” by most international affairs and trade analysts, is also believed to love the idea of a “deal” to solve trade and political conflicts. He has, in the past, accused India of being a “tariff king” and of having high tariff walls, even as the US kept its market open to Indian imports.

“The idea of a grand bargain or a trade deal appeals to Trump. But he will be a tough negotiator,” said Pinak Ranjan Chakravarty, former secretary in the Ministry of External Affairs, in a conversation with The Secretariat.

Oil, Military Purchases To Sweeten The Deal

Top government officials in New Delhi said Trump is likely to ask India to buy more oil and gas from the US. The US President has earlier indicated that he may withdraw from the Paris climate agreement, which aims to reduce carbon emissions, and adopt a policy of encouraging American oil giants to “drill more”.

Crude oil and LNG imports from America were worth about US$ 6.5 billion in 2023-24, or about 15.5 per cent of its total oil and gas imports that are valued at over US$ 42 billion.

In contrast, Russian oil accounted for about 30 per cent of India's imports in 2023-24, though it has come down to 25 per cent of imports in the first nine months of the current financial year. India became the top buyer of Russian oil sold at a discount because of sanctions in the wake of the Ukraine-Russia war.

The US has already indicated it wants India to buy more defence equipment from it as against its traditional arms supplier Russia. Deals that have been negotiated or are in the pipeline include the MH-60R Seahawk helicopters (US$ 2.8 billion), Apache helicopters (US$ 796 million) and the Large Aircraft Infrared Countermeasure (US$ 189 million), as also the purchase of 31 MQ-9B Predator drones worth US$ 3.3 billion.

Talks are on for the possible purchase of the fifth generation F-35 jet fighter, but India requires significant relaxation of norms and agreement for the transfer of technology which may be a sticking point for the deal.

Also being negotiated is a maintenance and overhaul station deal worth half a billion dollars for drones with General Atomics, whose CEO Dr Vivek Lall is believed close to the Trump administration.

A deal is also being considered between HAL and GE for the co-production of F-414 INS6 aircraft engines for Tejas Mark-II fighter jets, while the Indian Army is looking at the US-made Stryker armoured infantry vehicle as one of many options for its purchase.

“India will be looking at buying more defence hardware from the US as well co-production of equipment. It’s a natural progression of the Defence relationship between the two democracies,” said a former head of the strategic think-tank Manohar Parrikar Institute for Defence Studies and Analyses.

Other officials pointed out that one way to offset the adverse trade balance between India and the US was to ramp up defence purchases. India is the tenth nation by rank among those with a positive trade balance with the US.

In 2023-24, India exported some US$ 77.5 billion worth of merchandise and imported US$ 42.2 billion worth of goods, leaving a positive trade balance of US$ 35.3 billion in New Delhi’s favour.

Here are two related videos by The Secretariat : 1. Trump & India: A Complex Relationship  and 2. Rupee Hits Record Low of ₹87 against USD: What is Driving the Historic Fall?

(The second part of this two-part series on PM Modi's France-US trip will come tomorrow)