America and India strike a long-awaited trade truce

After months of trade friction America has agreed to slash tariffs on India. In return, India will halt its purchases of Russian oil, President Donald Trump announced on February 2nd. America’s “reciprocal” tariff on Indian goods will fall from 25% to 18%, said Mr Trump. An additional 25% levy, imposed in August as punishment for India’s purchases of Russian crude, will be lifted altogether, according to American officials.

India’s prime minister, Narendra Modi, confirmed the reduction in tariffs, though he was mum on Mr Trump’s claim that India had pledged to buy more American goods, including $500bn-worth of energy and agricultural products. Nor did Mr Modi comment on India’s purchases of Russian oil, which Mr Trump says are helping fund Russia’s war in Ukraine.

The truce will be a boon for the Indian economy. It has largely weathered the impact of Mr Trump’s tariffs. Outside a few regions specialising in gems or textiles, India is not geared towards manufacturing exports. Goods such as phones and generic drugs were exempt; the effective tariff on India’s export mix was around 35%. But the levies crushed any hope that India might benefit as companies seek to diversify their supply chains away from China. HSBC, a bank, estimated that the previous, higher tariffs would shave 0.7 percentage points off annual Indian growth. Now it reckons the effect will be half that.

Indian officials also hope the long-awaited trade deal will improve sentiment towards the country. Investment spending, by both foreign and domestic companies, has been muted even though India remains the world’s fastest-growing major economy. Economists in Mumbai, the financial centre, have lamented the absence of “animal spirits” despite a flurry of tax cuts and reform efforts that India announced following the imposition of tariffs. The Indian rupee rallied following the deal’s announcement. Equity indices also jumped. Although an 18% tariff is still high, it is lower than the levies America imposes on rival labour-intensive manufacturing hubs such as Vietnam, Bangladesh and China.

America’s relationship with India has fluctuated during Mr Trump’s second term. At a meeting in Washington in February 2025, Messrs Trump and Modi discussed plans to expand trade and deepen economic ties. But negotiations stalled—and then came the tariffs. Tensions were further inflamed by Mr Trump’s claim that he had brokered a peace between India and Pakistan following a conflict in May. Indian officials say America played little role.

Only lately have relations improved. The new American ambassador in New Delhi, Sergio Gor, is credited with taking the edge off since his arrival in January. Mr Trump may also fear being left behind: his announcement came less than a week after India and the European Union unveiled their own trade deal.

Mr Trump’s bombastic claims are unlikely to be realised. Indian imports of Russian oil were already declining before the deal, partly owing to stricter American sanctions. Yet the country regards its energy-sourcing decisions as a matter of national sovereignty. The Kremlin said that it had heard nothing from India about cutting purchases after the deal was announced. They are unlikely to quickly go to zero. The notion that India could soon buy $500bn of American goods is even less credible. In 2024, the latest available, its total imports from America, including goods and services, amounted to $83bn.

Might India eliminate its tariff and non-tariff barriers on American goods in full, as Mr Trump says it has promised? That, too, is improbable. Agriculture has long been a sticking point. India restricts GM crops and prohibits feeding cattle with animal by-products. And sure enough, two days after the deal was announced, Piyush Goyal, India’s commerce minister, said agriculture and dairy had been “completely protected”. America’s trade representative, Jamieson Greer, confirmed India would retain protections in some “key areas”.

For India, the risks are two-fold. The first is that Mr Trump becomes frustrated. He has talked of higher tariffs on South Korea and Japan unless they follow through on investment targets they negotiated with Uncle Sam last year. A deal with the EU did not prevent him from threatening the bloc with tariffs during a dispute over Greenland. The second risk is domestic. India has managed the trade war reasonably well, using it as a spur to deregulate the economy, tidy up the tax code and strike new deals with other export markets. The challenge is to keep up that reform energy even as the trade war cools down. ■