When Indian Prime Minister Narendra Modi made a state visit to the US in June 2023, the pomp and pageantry reflected how keen the US side was to promote the countries’ strong ties.
“I’ve long believed that the relationship between the United States and India will be one of the defining relationships of the 21st century,” said then-President Joe Biden when welcoming Modi.
When Modi returned to the White House earlier this year to meet the newly elected Donald Trump, there was less pageantry but still considerable warmth and much talk of deal-making.
Six months later, the situation has changed dramatically. As of August 27, most Indian goods going into the US market now face a 50% tariff, one of the highest rates in the world.
Tensions escalated swiftly after the US and India failed to strike an agreement during trade talks in the wake of Trump’s major announcement of tariffs against trading partners in April. Matters got even worse when Trump announced an additional 25% tariff on India over its purchases of Russian oil.
The deterioration in relations with one of the US’ key strategic partners in the Indo-Pacific region has alarmed those in Washington who see the relationship with India as vital for regional stability and security. Meanwhile, in India, there is grave concern over what the tariffs will mean for the country’s fast-growing economy.
Why have things gotten this bad?
Rick Rossow, who holds the Chair on India and Emerging Asia Economics at the Center for Strategic and International Studies (CSIS) in Washington, told DW he believes Trump was right to call out India’s “protectionism” but says the tools and rhetoric being used to deal with the issues are “harsh” and increasingly causing political damage to Modi.
While many have interpreted the breakdown in negotiations as resulting from India’s refusal to stop buying Russian oil, Sushant Singh, lecturer of South Asian studies at Yale University, believes it is connected to the India-Pakistan conflict which took place in May this year and Trump’s role in ceasefire negotiations.
“It (the ceasefire) is something which Trump claims came because of him and his officials, whereas Modi domestically wants to project that it came because he pummelled Pakistan, and Pakistan came on its knees, begging and asking for a ceasefire,” he told DW.
“I think that is something where Modi can’t afford to concede to Trump because his domestic political argument would completely be negated.”
How is India affected?
India’s economy is now under pressure from the tariffs. The US is its biggest trade partner, with India exporting around $87 billion (€74.5 billion) worth of goods to the US in 2024. The Global Trade Research Initiative, a New Delhi-based think-tank, predicts that number will fall by more than 40% in 2026, dropping to around $50 billion.
India’s main exports to the US include sectors such as textiles and jewellery and gemstones. The Global Trade Research Initiative thinks some of those sectors could see a massive collapse in export volumes over the next 12 months, potentially putting hundreds of thousands of jobs at risk.
But Rossow noted that, as the tariffs targeted goods and manufacturing remained a relatively small share of India’s economy, at around 14%, the impact on the “real economy will be limited.”
However, he also pointed out that Modi had been prioritizing manufacturing and ‘Make in India’ policies. “Worsening access to the largest export market may stifle this part of the economy at a critical juncture,” he said.
Is there a downside for the US?
The US exported around $42 billion worth of goods to India in 2024, less than half the amount going in the other direction.
“If you look at the balance sheet, the losses are mainly India’s,” said Singh. “Under Trump, the US is clearly approaching China, India and the Indo-Pacific differently. So India has no leverage.”
Rossow said that while India would clearly suffer more than the US economically, the US would also pay a price, notably in the form of a big expected drop in Indian students coming to US universities.
Gary Hufbauer, an international trade expert with the Peterson Institute for International Economics, said one economic factor to consider is that previous US plans to move some manufacturing away from China to India are now threatened.
“For a while it looked like India would be the alternative manufacturing site for a lot of stuff made in China,” he told DW. “But that looks unlikely now.”
Singh pointed to the fact that, despite some Indian workers being forced to leave the US as part of Trump’s immigration crackdown, prominent Indian-US tech leaders had not spoken out against the US president. “None of them are going to take on Trump because they are also scared.”
However, he acknowledged that the big risk for Trump was geopolitical, rather than economic.
“You could have a situation where China essentially emerges as this big Asian power, with India willing to accept a slightly lower role, and they could align geopolitically – that would be geopolitically very detrimental to the United States.”
Is there still space for a deal?
India and the US could still strike a trade deal, and Sushant Singh believes New Delhi is desperate to get one done.
“They want to have a deal,” he said. “They want to give Trump a win. It could happen any time, any week, any month, knowing the nature of the Trump administration.”
Rossow thinks a thaw in tensions is in both sides’ interests.
“India is on the verge of becoming the world’s third-largest economy,” he said. “With our shared concerns about China’s rise, militarily and economically, a strong partnership will be crucial for regional security and shared growth.”
Singh believes the whole episode represents a serious threat to Modi domestically — something which could force him to the table.
Edited by: Ashutosh Pandey
Source link
