Why India Needs to Move at the Pace that Washington wants on a Trade Deal

Editor's note: This article was originally published on May 22, 2025 and does not reflect developments post May 22. 

When Indian Prime Minister Narendra Modi met U.S. President Donald J. Trump at the White House on February 13, 2025, they announced the launch of a new initiative – the “U.S.-India COMPACT (Catalyzing Opportunities for Military Partnership, Accelerated Commerce & Technology) for the 21st Century.” While the parties clearly signalled their desire to continue building out their defence and technology partnerships, they also recognised that Delhi had to address Washington’s concerns about India’s high trade tariffs and the persistent U.S. trade deficit with India to ensure the overall health of the bilateral relationship. It is therefore in the interests of both countries to reach an agreement soon on the first phase of a trade deal, perhaps on terms tilting toward U.S. demands now, but with possible adjustments down the road further addressing Indian concerns.

India’s response to change

Trump and Modi had developed a close relationship during the first Trump administration. Seeking to capitalise on this goodwill, Modi and his team have taken a forward-leaning approach in addressing trade issues with the new Trump administration, even beginning before the Inauguration. When External Affairs Minister S. Jaishankar travelled to Washington in late December 2024 for farewell meetings with senior members of the outgoing Biden administration, he also had an initial meeting with incoming National Security Advisor Michael Waltz to start a dialogue with the new administration. Jaishankar followed this with his attendance at the Trump Inauguration and a bilateral meeting with the new Secretary of State Marco Rubio.

The Indians sought an early visit to Washington by the Prime Minister to advance bilateral ties. Shortly before Modi’s mid-February 2025 trip to Washington, the government of India unveiled its 2025 Union Budget in late January, with elements seemingly designed to try to avoid the U.S. imposition of punitive trade tariffs. That Budget featured unilateral tariff cuts on several items important to America, such as high-end motorcycles, luxury cars, and some electronics and industrial goods, though in several cases the reductions still left tariffs relatively high.

At the Trump-Modi meeting on February 13, the Prime Minister announced a few additional tariff cuts – such as on bourbon whiskey – as the two leaders launched a new initiative – Mission 500. That initiative aimed to more than double bilateral trade in goods and services from $210 billion in 2024 to $500 billion by 2030. To reach this figure, they announced plans to negotiate the first tranche of a “mutually beneficial, multi-sector Bilateral Trade Agreement (BTA),” by the fall of 2025. They further agreed to implement “new, fair-trade terms” in the BTA.

All these steps seemed to indicate India’s willingness to make substantial tariff cuts. Nevertheless, that same day, Trump announced a “Fair and Reciprocal Plan” on trade. When asked about this plan at his joint press conference with Modi, Trump stated that India is “about the highest tariff nation anywhere in the world.”

The rush before July

Since then, Indian and U.S. trade delegations have travelled to each other’s capital seeking to hammer out at least the first phase of a trade deal. The Indians reportedly put a broad range of tariff cuts on the table at the outset of negotiations, perhaps hoping to avoid the “reciprocal tariffs” that Trump planned to announce on April 2 (so-called “Liberation Day”). However, when the White House issued its list of 60 countries that would have new tariffs of more than 10 percent (based on a novel formula that, in part, took account of the U.S. trade deficit in goods with a given country, divided by the total quantity of U.S. imports from that country), it included a rate of 26 percent for India.

India, therefore, had not escaped the U.S. plan for reciprocal tariffs to go into effect one week later, on April 9. But prior to that time, the President issued an Executive Order suspending all reciprocal tariffs (except on China) for a period of 90 days – likely because of sharply declining financial markets, sliding bond prices, and the fact that many countries had responded to the threat of new tariffs by reaching out to the US to discuss trade deals.

This suspension has put the burden on countries to try to be in the initial group of those concluding trade agreements with the US, thereby hoping to avoid the imposition of reciprocal tariffs on July 9. India is near the top of the list of countries likely to conclude such an agreement because of Modi’s early engagement with Trump, their joint aspiration to conclude the first tranche of a BTA by the fall, and the ongoing talks between trade officials. But after at least four rounds of negotiations, the two countries have still not sealed the deal. While the Indians have reportedly put on the table a range of tariff cuts, including on industrial goods, there is U.S. pressure for some cuts in the sensitive area of agricultural products as well as the need for India to reduce some non-tariff barriers such as quality control requirements, and alter its strict data localisation rules.

In the meantime, the Trump administration has announced that it has concluded a term sheet for its fi rst trade deal – that with the United Kingdom. Washington has also agreed with Beijing to substantially lower, for a period of 90 days, U.S tariffs on Chinese goods from 145 percent to 30 percent, and Chinese tariffs on articles from the US from 125 percent to 10 percent. While both these agreements are thin on substantive details, their signings provide even greater urgency for the US and India to reach an agreement.

For the US, India is a key partner in the Indo-Pacific and an integral member of the Quad grouping (Australia, India, Japan, and the US) that serves as a regional counterweight to a rising China. A U.S.-India trade deal would enhance the strategic dimension of their bilateral relationship. India is also an important contributor to the U.S. technology sector, with complementary capabilities for joint development and production of critical and emerging technology products. In addition, India hosts almost 2,000 U.S. companies and can be a significant purchaser of U.S. energy and defence equipment. In short, for a Trump administration interested in demonstrating that it can conclude important trade deals with significant countries, India is a prime candidate.

The benefits of a deal for India

For India, there are, in my view, several compelling reasons for being in the initial group of countries that conclude an agreement with the US. First, the US is India’s largest trading partner for goods and services. Delhi should want to lock in the benefits of the U.S. as an export market by concluding a deal. This is especially the case because India has world-class companies that can compete successfully in the US if tariffs there are not prohibitively high.

Second, Delhi should want to benefit from the relatively higher U.S. tariffs currently applied to Chinese goods and the comparatively higher proposed reciprocal tariffs for other Asian countries, such as Vietnam (46 percent), Bangladesh (37 percent), Thailand (36 percent), Indonesia (36 percent), and Taiwan (32 percent), by getting its own U.S. tariff level as low as possible. Moreover, if one of India’s concerns is not to have to lower its tariff rates for Chinese products (so it is not further flooded with Chinese imports) while lowering them for American goods, signing a BTA with the US is the best way forward, as the WTO permits such preferential agreements as an exception to its “most-favored nation” principle.

Third, a BTA with the US would send a strong positive signal to the U.S. trade and investment community that India welcomes and is open for business. This is critical for India to attract foreign investment in the manufacturing sector and promote itself as an alternative supply chain hub to China, which is one of India’s strategic priorities.

Fourth, the government of India now seems to recognise that expanding trade relations with the West through bilateral agreements is central to its own economic growth, as it signed a deal with the European Free Trade Association last year and recently concluded a deal with the United Kingdom. India is currently negotiating an agreement with the European Union, in addition to its ongoing discussions with the US. To the degree that Delhi needs to make some politically difficult concessions to conclude such deals, especially with America, it can blame Washington for reforms that, while perhaps controversial domestically, may be beneficial in the long run for the Indian economy.

Finally, Modi – more so than most elected leaders – seems to have the political capital, based on his widespread popularity and the lack of a forceful opposition party, to withstand any domestic criticism that inevitably comes with reaching a trade agreement that requires some difficult concessions.

Sensitive decisions ahead

The deal that Trump announced with the United Kingdom – a country, unlike India, with which the US has a trade surplus – might provide some hints as to what Washington may expect from Delhi. For example, the Americans sought and received British concessions in the politically sensitive agricultural sector – with increased access for American beef, ethanol, and other products produced by American farmers. The parties also briefly addressed non-tariff barriers, digital trade, and intellectual property rights. However, despite the agreement, the US largely kept in place the baseline reciprocal tariff rate of 10 per cent on UK products. Perhaps this portends that Washington will demand some agricultural concessions by Delhi that may be politically difficult for the Indians, will want to address several non-tariff issues, and will only agree to reduce the announced 26 per cent reciprocal tariff to 10 per cent at this time.

Delhi may be reluctant to accept such demands, seeking instead to negotiate what they view as a more balanced, multi-staged, and mutually beneficial deal. But the US regards the trade relationship as out of balance and, for reasons noted above, it could be a perilous strategy for India to hold out for a deal it may not get and lose the momentum in the partnership that flowed out of the Trump-Modi meeting. Instead, unlike most other countries, if India agrees now to the first phase of an agreement with what they view as less-than-ideal terms, they will likely get a second bite at the apple in the late fall when Trump is scheduled to visit Delhi for a Quad summit.

However, without a deal now, it is not even clear that Trump would travel to India. But with a deal by July 9, Trump may well be inclined to agree to other trade terms more favourable to India as one of the “deliverables” of his visit in the fall.

In sum, now should not be the time for India to insist on incremental changes by each side in its trade negotiations with the US. Rather, Delhi may want to offer significant concessions now that would clearly seal an initial deal with the prospect of gaining goodwill with Trump and receiving some payback later in the year in the next tranche of a BTA. If the parties are ultimately able to conclude a BTA, it would be a historic event in US-India relations.