Aug 1, 2025
12
mins read
In July 2025, US President Donald Trump announced a 25% tariff on Indian imports starting August 1, citing India’s high trade barriers and its energy ties with Russia. The move has delayed the long-awaited India-US trade deal, despite earlier progress on a bilateral framework. India has officially responded by reiterating its commitment to a fair, balanced, and mutually beneficial trade agreement, while emphasizing the need to protect its domestic industries, especially agriculture and MSMEs. The unexpected tariffs have also impacted investor sentiment and triggered concerns over the Indian stock market and export sectors. As both countries gear up for another round of talks in late August, this trade deal standoff holds significant implications for India’s external sector and economic diplomacy.
India and the United States share a strategically important economic relationship, and while bilateral trade with the U.S. recovered strongly in FY 2024–25, with total commerce reaching US $ 131.8 billion, India’s largest trading partner in the previous fiscal year (FY 2023–24) was China, with US $ 118.4 billion of trade compared to US $ 118.3 billion with the U.S.. However, underlying this strong commercial engagement are longstanding issues-such as tariff imbalances, agriculture access, and digital trade regulation-that have slowed progress toward a comprehensive India-US trade agreement.
The 2025 India-US bilateral trade agreement was expected to reset ties, enhance exports, and resolve key friction points. Yet, the sudden imposition of India-US trade tariffs 2025 by the US and India-US trade deal delay have complicated negotiations. This blog explains the key reasons for the delay, the impact on the trade balance of India, and the broader implications-including the impact on Indian stock market trade deal expectations. It also analyzes India's response strategy and the possible way forward, especially from the lens of UPSC-relevant economic diplomacy.
What Triggered the Trade Tensions?
Trade Deficit Concerns: Trump slammed India’s “obnoxious” trade practices and high tariffs, citing a large U.S.-India trade deficit.
Russia Factor: India’s continued oil purchases and defence ties with Russia post-Ukraine war remain key irritants.
Stalled Trade Deal: Previous trade talks showed promise and a possible deal, with a potential agreement in sight, but the tariffs suggest strategic posturing.
Table of content
During Prime Minister Narendra Modi’s visit to Washington on February 13, 2025, both India and the United States agreed to initiate talks on a multi-sector Bilateral Trade Agreement (BTA), aiming to finalize the first stage by the fall of 2025. This BTA is not formally labelled a Free Trade Agreement (FTA), which makes its legal and trade deal implications particularly significant.
The proposed India-US bilateral trade agreement seeks to enhance market access, reduce tariff and non-tariff barriers, and create a sustainable trade mechanism across sectors. However, the scope and nature of the BTA remain undefined. It is likely to include sectors like pharmaceuticals, dairy, digital goods, and defense.
Unlike FTAs that typically require elimination of tariffs on substantially all trade, the BTA might focus on partial liberalization-a factor that may raise compliance questions under WTO law.
Both India and the US are members of the World Trade Organization (WTO) and are thus bound by its norms. Any India-US trade deal must align with global trade principles, particularly the General Agreement on Tariffs and Trade (GATT), which codifies key parts of international trade law.
The WTO’s Most Favoured Nation (MFN) principle prohibits preferential treatment to one trading partner without extending it to others. Hence, reducing tariffs only for the US without extending them to other WTO members may breach global rules.
As per Article XXIV.8(b) of the GATT, a valid FTA must eliminate tariffs and trade restrictions on substantially all trade among the members. Even for an interim agreement like the proposed BTA, formal notification to the WTO is required, and it must outline a clear plan for compliance with GATT provisions.
The ongoing India-US trade deal delay stems from deep divergences in economic principles, WTO norms, and stakeholder politics. Below is a combined synopsis of all key Next IAS points and essential supporting insights:
The 25% tariff on India places the country at a competitive disadvantage compared to regional peers who have negotiated terms. Japan and the European Union face 15% tariffs, South Korea secured a 15% rate, Indonesia faces 19%, and Vietnam 20%. This disparity threatens to divert orders to countries, undermining India's export competitiveness.
President Donald Trump’s tariffs on Indian imports have been a major point of contention, with the US imposing a 25% tariff on goods imported from India, affecting key sectors such as textiles, pharmaceuticals, and automobiles.
The US President Donald Trump’s tariffs have been justified as a measure to reduce the trade deficit and protect American industries, but India has argued that the tariffs are unfair and will harm its economy.
The Trump administration has been negotiating with India to reach a bilateral trade agreement, but the talks have been slow, and the tariff threat remains a major concern for Indian exporters.
The US has also imposed tariffs on other countries, including China, Mexico, and Canada, as part of its trade policy, with the aim of reducing its trade deficit and protecting American industries.
Bilateral US‑india trade reached ≈ $131.84 b (India goods + services on both sides ≈ $191 b) in FY 2024‑25; the US remained India's single largest trading partner.
From 5 Apr 2025, the US rolled out a flat 10 % baseline tariff on imports, layering on a 26 % reciprocal tariff on most Indian goods (pharma and electronics largely exempt).
Negotiations intensified to clinch an India‑US trade agreement - initial target was 9 July 2025, now stretched to 1 August under pressure of looming tariff hikes.
Sticking points include US demands on market access for GM crops (corn, soybean), relaxed Indian data‑localisation and medical‑devices rules.
India wants reciprocal tariff relief on textiles, gems & jewellery, electronics and pharma - key for export‑driven states.
Digital‑trade disciplines, customs facilitation and services commitments (not yet in goods‑only interim deals) are emerging agenda items.
Trade balance: US ran a $45.7 b goods deficit with India in 2024, underscoring American impetus for “reciprocal” levies.
Key export‑risk sectors: gems‑jewellery, textiles, auto‑components and electronics; investor anxiety hit Indian markets ahead of tariff cliff.
Macroeconomic Impact on the Indian Economy
The India-US trade tariffs 2025, especially the sudden 25% duties imposed by the US on Indian goods, have significantly impacted India’s macroeconomic indicators. The Indian rupee has depreciated against the US dollar, making imports costlier and affecting inflation. Additionally, as Indian exports became more expensive in the US market, demand contracted, causing a fall in export revenue.
GDP Growth Decline: India’s GDP growth rate has shown a declining trend in recent quarters. Experts have attributed part of this slowdown to global trade tensions and the India–US trade deal delay.
Widening Trade Deficit: As exports shrink while imports remain steady or rise, India’s trade balance has worsened, contributing to a growing trade deficit.
Export Dependency: India is heavily reliant on global demand-especially from the US-for goods like textiles, IT services, pharmaceuticals, and gems. The abrupt tariffs disrupted this flow and impacted earnings.
Effects on Indian Exports
The tariffs have had a direct and damaging effect on Indian exports. The US is India’s top export destination, accounting for a significant portion of outbound trade. With elevated tariffs:
Export Volumes Declined: Indian exports to the US have dropped sharply in the last two quarters of 2025.
Competitive Disadvantage: Indian goods, now subject to 25% tariffs, are more expensive compared to those from Vietnam, Bangladesh, and China.
Sectors Affected: Core export industries-textiles, pharmaceuticals, auto parts, and electronics-have suffered the most.
Market Diversification Challenges: While the Indian government has pushed for diversification, new markets take time to develop, and US-bound exports remain difficult to replace in the short term.
Impact on Indian Companies
The impact on Indian companies has been severe, particularly for firms with large US-based revenues or operations. The elevated tariffs have:
Reduced Profit Margins: Many exporters have had to absorb the additional costs, cutting into their profit margins.
Investment Delays: Several Indian firms have put investment and expansion plans on hold due to uncertainty in trade deal policy and global demand.
Operational Strain: Companies have struggled to manage overhead costs, inventories, and raw material pricing amidst reduced demand.
Reliance on Government Support: The Indian government has responded with export incentives, credit subsidies, and support packages, but these have only partially cushioned the blow.
To counter the adverse effects of the India–US trade deal delay and associated tariffs, India must adopt a multi-pronged strategy:
1. Pursue WTO-Compliant Trade Agreements
India must ensure any India-US bilateral trade agreement adheres to WTO law, including Article XXIV of GATT. A phased interim agreement, with time-bound commitments, can provide both compliance and flexibility.
2. Strengthen Export Ecosystem
Invest in productivity, quality certification, and global logistics infrastructure to enhance India’s competitiveness in exports, especially in labor-intensive sectors like textiles, gems, and chemicals.
3. Diversify Export Destinations
India must accelerate trade engagements with Africa, Latin America, ASEAN, and West Asia. FTAs with the EU, UK, and Australia also present opportunities to hedge against US-related risks.
4. Negotiate Sectoral Relief
In ongoing trade talks, India should push for exemptions or rollbacks on sensitive sectors-such as agriculture, pharmaceuticals, and auto components-as these form a major portion of India’s export value to the US.
5. Build Domestic Manufacturing Base
Through initiatives like Make in India, PLI schemes, and Aatmanirbhar Bharat, India must continue to reduce import dependency and become more self-reliant in core sectors.
Q. Why has the Indian rupee depreciated sharply after the tariffs?
A. Reduced export inflows and capital outflows increased dollar demand, weakening the rupee. RBI may intervene as volatility continues.
Q. Which sectors are most affected by the 25% tariffs?
A. Textiles, pharmaceuticals, gems & jewellery, electronics and auto parts—India’s major exports to the US are under pressure.
Q. How is Indian GDP growth affected by these tariffs?
A. Experts expect up to 40 basis points reduction in GDP growth in FY 2025‑26, due to reduced investor confidence and export performance.
Q. How is the Indian government supporting exporters?
A. It is offering export incentives, duty drawbacks, credit schemes (like RoDTEP/MEIS), and encouraging PLI-based diversification.
Q. Can India legally challenge the US tariffs at the WTO?
A. Yes, India could initiate dispute resolution, though current strategy favours negotiation and diplomacy rather than litigation.
Q. What is the way forward for India’s trade strategy?
A. Diversify export markets, fast-track trade agreements, boost competitiveness through PLI and reforms to reduce export dependency on the US.
The delay in finalizing the India–US trade agreement and the imposition of India–US trade tariffs 2025 have exposed the fragility of bilateral economic ties. While the two nations share common strategic interests, their trade objectives remain misaligned, especially regarding tariffs, subsidies, and agriculture. The impact on India’s economy—from GDP deceleration to weakening exports—underlines the urgency of crafting a forward-looking and WTO-compliant India–US bilateral trade agreement.
India’s path forward lies in cautious engagement with the US, proactive diplomacy at the WTO, and robust reforms at home to make its export economy resilient. For UPSC aspirants, this episode offers a key case study on trade diplomacy, global governance, and national interest.
Internal Linking Suggestions
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External Linking Suggestions
UPSC Official Website – Syllabus & Notification: https://upsc.gov.in/
Press Information Bureau – Government Announcements: https://pib.gov.in/
NCERT Official Website – Standard Books for UPSC: https://ncert.nic.in
