Donald Trump forces India’s hand on tariffs #IndiaFinance

US President Donald Trump is pushing Prime Minister Narendra Modi to do what India for decades could not or would not do: lower the high tariff walls that have surrounded the world’s largest developing economy since independence.

Piyush Goyal, India’s commerce minister, was in Washington last week for discussions on a bilateral trade agreement meant to fend off Trump’s threat last month of reciprocal tariffs.

While Indian officials say discussions are “advancing”, Trump on Friday said New Delhi had agreed to cut its tariffs “way down”. US commerce secretary Howard Lutnick said India needed to buy more defence products and lower its tariffs for the two countries to sign a “grand” bilateral deal.

The US ultimatum has prompted what some analysts say is a broader realignment on trade by New Delhi, which has traditionally been a tough negotiator. India in February relaunched its long-running free trade agreement talks with the UK and pledged to complete an FTA with the EU within the year.

“India’s political leadership understands the Trump disruption and the opportunity for reworking our relationships with the US, the EU and the UK,” said Raja Mohan, a visiting professor at the Institute of South Asian Studies in Singapore. “If there is political will, it is possible that India will soon have these three trade agreements that will reshape our ties with the west.”

Already, Modi has promised to buy more US oil and gas, though it has closer and cheaper suppliers in the Middle East and Russia. The two countries also agreed to conclude the first tranche of a “mutually beneficial, multisector” bilateral trade agreement by autumn.

But India, which has protected its industries fiercely since independence in 1947, has some of the world’s highest average tariffs, and the cost of cutting them will be politically sensitive, particularly in agriculture, where nearly half of Indians work.

The negotiation could well fail, which could bring retaliatory tariffs as soon as April, Indian analysts said. Speaking to Fox News host Sean Hannity after his February 13 meeting with Modi, Trump said he told India’s prime minister: “Whatever you charge, I’m charging”.

The Modi government has since 2014 signed FTAs with Australia, the United Arab Emirates and the European Free Trade Association.

However, it has also since 2020 introduced tariffs to protect emerging industries such as solar equipment and electronics and support what Modi calls Atmanirbhar bharat (“self-reliant India”), in an echo of past protectionist governments.

In FTA talks with EFTA and the UK, the Modi government has been a hard negotiator, analysts said, demanding that its trading partners reduce their tariffs more than India does on the basis that it is growing faster and presents rich economies a bigger future market opportunity than they do.

However, they noted that India’s trade stance vis-à-vis Washington has been meeker, perhaps reflecting America’s status as a strategic defence and economic partner.

The US is India’s largest trading partner, with $129bn of mutual trade in 2024, though EU countries collectively account for more. The US’s India trade deficit reached more than $45bn last year — less than half of the “almost $100bn” deficit Trump claimed at the White House, but the 10th largest of America’s trade partners.

The tariffs India imposes on US goods are higher than America’s, in some cases by a big margin. While the gap for industrial products is 3.3 per cent, for agricultural products it stands at 32.4 per cent, according to the Global Trade Research Initiative (GTRI), a New Delhi think-tank.

Before and after Modi’s Washington visit, India announced a round of largely symbolic tariff cuts on bourbon whiskey, luxury cars, and large motorcycles, the last to address a long-running Trump complaint about tariffs on Harley-Davidson.

The two sides also agreed to increase US exports of industrial goods to India and Indian-manufactured products to the US and pledged to “work together to increase trade in agricultural goods”, reduce tariffs and non-tariff barriers and deepen supply chain integration.

It is in agriculture that Modi faces the most politically sensitive challenges.

India’s protected dairy industry, which enjoys import tariffs of 30-60 per cent, played a critical role in prompting the country to pull out of talks to form the Regional Comprehensive Economic Partnership the year before its ratification by 15 Asia-Pacific countries, including China, in 2020.

The biggest dairy company Amul petitioned Modi’s government, warning that RCEP would hurt India’s approximately 100mn dairy farmers, many of them smallholders. India’s powerful farming lobby also forced New Delhi into a rare retreat on three farming bills meant to overhaul agriculture by staging mass protests in 2020-21.

“There are certain sectors in which cutting tariffs could be problematic, notably agriculture,” said Biswajit Dhar, a former negotiator for India with the World Trade Organization and distinguished professor at the Council for Social Development.

“The US-India joint statement mentions agricultural products, but the onus is on India to cut,” Dhar said.

Lutnick said India had to “open up” its agriculture market.

While India’s agricultural goods tariffs are higher, the US spends much more on subsidies, Dhar added.

Indian analysts also believe that Washington may push New Delhi to open government procurement to US companies and remove restrictions on data flows — sensitive demands for a developing country that values its economic sovereignty.

The trade talks promise to be fraught, they said.

“The best option for India is that we make tariffs on almost all industrial tariff lines ‘zero for zero’,” said Ajay Shrivastava, founder of GTRI, the research group. “But any discussion of agriculture has to be very nuanced, because it’s a livelihood issue for us.”