This report is from this week’s CNBC Inside India newsletter, delivering timely and insightful news and market commentary on emerging powers. Subscribe here.
big story
India-US relations looked set to reach new heights in early 2025.
Prime Minister Narendra Modi was one of the earliest foreign leaders to meet with new President Donald Trump in February, just hours after signing a plan to introduce “mutual tariffs.”
The outlook was strong as leaders of the world’s largest and oldest democracies shook hands and vowed to double bilateral trade to $500 billion by 2030, with Prime Minister Modi saying “our teams will soon work towards a mutually beneficial trade deal.”
By December, it had been shortened, leaving India with one of the highest tariffs in the world. The tariffs even dwarf the tariffs against China that President Trump targeted during his campaign.
WASHINGTON DC – FEBRUARY 13: US President Donald Trump and Indian Prime Minister Narendra Modi meet in the Oval Office of the White House on February 13, 2025 in Washington, DC.
Andrew Harnik | Getty Images News | Getty Images
Sonal Varma, Nomura’s chief economist for India and Asia ex-Japan, said India and the US have “strong economic incentives” to reach a deal. He said the US needs reliable supply chain partners outside of China, and India offers scale and capabilities, while New Delhi needs market access to Washington to sustain its export-led growth ambitions.
However, negotiations seem to have hit a wall. The US trade delegation concluded another round of talks in New Delhi last week, but no progress was made, although US Ambassador to India Sergio Gore called the meeting between Prime Minister Modi and President Trump “excellent.”
“I think the biggest hurdle is political will,” said Mark Linscott, former assistant secretary of the U.S. Trade Representative and senior adviser at the U.S.-India Strategic Partnership Forum, adding, “Tariffs and agriculture are always difficult.”
He suggested that “big gestures” such as “offers to buy U.S. fuel ethanol and sustainable aviation fuel” could be considered as a way to get Trump’s support.
The United States aims to improve its trade balance with the world’s fastest-growing major economy by increasing sales of energy and agricultural products, but India has only a partial agreement on energy procurement and resists access to the politically sensitive agricultural sector.
“There is resistance in India to certain row crops and other meats and products,” U.S. Trade Representative Jamison Greer told the Senate earlier this month, adding, “They are very difficult nuts to crack.”
troublesome problem
India is under pressure from the United States to cut its imports of Russian oil, which Washington says will allow Russia to withstand the pressure of Western economic sanctions and continue its war against Ukraine.
In August, the United States imposed an additional 25% tariff on imports from India to prevent New Delhi from purchasing Russian crude oil, raising the total tariff to a maximum of 50%.
The United States has acknowledged that New Delhi is cutting oil imports from Russia, but during a visit to India earlier this month, President Vladimir Putin said Russia was ready to provide “uninterrupted fuel shipments to India.”
India has not officially said it would cut oil shipments from Russia.
Earlier this month, the Ministry of Foreign Affairs rejected private refiners’ interference in oil procurement, stating, “Our country’s energy procurement depends on trends in the world market, and it is also our urgent need to supply affordable energy to our 1.4 billion people.”
Reuters reported on Wednesday that Indian refiners resumed buying crude in November from Russian companies that are not subject to U.S. sanctions and “offer deep discounts.”
Experts believe a peace deal between Russia and Ukraine will end the conflict and negate 25% “punitive” tariffs on India, but giving the US access to agricultural markets will remain a major bottleneck and will prevent a trade deal from being struck.
Nomura’s Varma said agriculture is the “main stumbling block” as the US wants India to allow it to buy genetically modified crops and export dairy products. Both face strong opposition from India’s domestic agricultural lobby, which has significant political influence.
This is even more important as larger state elections in India are scheduled for next year, including in West Bengal, Tamil Nadu and Kerala, where agricultural lobbies are strong, and in Uttar Pradesh, the country’s largest agricultural state, in 2027.
bear the cost
New Delhi and Washington are negotiating a mutually beneficial agreement, but delays are proving costly.
“The prolonged absence of an agreement has real economic implications,” said Pradeep Gupta, chairman and managing director of Anand Rati Share & Stock Brokers, adding that capital flows are an immediate concern due to “significant volatility”, which is also reflected in the weaker rupee.
The absence of a trade deal has made markets “somewhat cautious”, especially regarding sectors that are “US-dependent,” Mr. Gupta said, adding that the moment trade fronts are clear, “the uncertainty premium will be significantly reduced.” In other words, Indian stocks could soar.
His firm estimates that a 50% tariff could reduce India’s GDP growth by about 0.5 percentage points and have a significant impact on export volumes. Goldman Sachs estimates that the US tariffs will affect the Indian economy by 0.6 percentage points.
India’s exports fell sharply in October but are mostly on track to increase despite the tariffs taking effect.
“While India has successfully weathered the shock of 50% tariffs and successfully worked around them, at the end of the day, the United States remains the largest export destination for Indian products,” Michael Kugelman, senior fellow for South Asia at the Atlantic Council, told CNBC’s “Inside India.”
“India will have to make politically risky decisions,” he said, adding that it was still unclear whether a deal would be reached in the near future.
Samiran Chakraborty, Citi’s chief India economist, said last week while discussing India’s outlook for 2026 that the lack of a trade deal with the United States “has serious implications for India.”
Meanwhile, U.S. experts say the tariffs are contributing to inflation and highlighting affordability issues for families across the country.
“Punitive tariffs[against India]will hurt U.S. consumers who are increasing their spending on a wide range of goods,” said Wayne Winegarden, a senior economics fellow at the Pacific Institute.
“President Trump’s arbitrary, unnecessary, and pointless trade war has created difficulties for the U.S.-India relationship,” Weingarten said, warning that this deterioration in relations is not good for both countries.
To pay for President Trump’s new tariffs, some small and medium-sized businesses in the United States are taking on high-interest loans and other forms of debt, with several business owners warning they fear financial disaster.
Indian analysts also say U.S. importers of medicines, machinery and even consumer goods face rising input costs and supply chain friction.
But despite talk of India as an “important strategic partner” and Prime Minister Modi as a “great friend” and all the economic reasons to support a trade deal, experts say they see no significant progress toward a deal as the year ends.
“We thought[at the beginning of the year]that India would be the first country to have a trade deal, but now at the end of the year, India is the last country without one,” Citi’s Chakraborty said.
Will there be fresh ideas discussed from both sides in the new year? Watch this space.
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Rajiv Batra, head of Asian equity strategy and co-head of global emerging market equities at JPMorgan, said the firm is overweight in Indian stocks and expects earnings to rebound in the coming quarters with the potential for double-digit growth.
Ajay Sahai, executive director and CEO of the Federation of Indian Export Organizations, said that despite the lack of a US-India trade deal, about 50% of India’s exports are still protected from tariffs, and exporters are still absorbing most of the costs as they wait for the levies to be eased.
Michael Kugelman, senior fellow for South Asia at the Atlantic Council, said Prime Minister Narendra Modi’s visit to Jordan, Ethiopia and Oman was an opportunity to strengthen trade ties as India faces trade uncertainty with the United States.
need to know
India’s manufactured goods exports will increase in November. Exports rose 19% year-on-year to $38.13 billion in November due to a sharp improvement in trade with the U.S. The country’s merchandise trade deficit, which hit a record high of about $41.7 billion in October, narrowed to $24.5 billion in November, exceeding analysts’ expectations.
Inflation rose in November. Consumer inflation rose to 0.71% in November, accelerating from a record low of 0.25% the previous month, due to higher prices for vegetables, eggs, meat and fish, spices and fuel. Inflation rose in both urban and rural areas.
Local manufacturing of rate earth magnets. The Ministry of Heavy Industries has reportedly launched a 72.8 billion rupee ($805 million) incentive scheme to encourage domestic manufacturing of rare earth permanent magnets as India seeks to reduce its dependence on imports.
Quote of the week
Currently, the latest estimates suggest that India lost around $250 billion in 2024 alone as a result of air pollution. We may not walk on the sidewalks, we may not shop much, and people may avoid Delhi. Because from a tourism point of view, (it) is just too unbelievable.
— Gaurav Gupta, Global Managing Partner, Dalberg Advisors
at the market
India on Thursday nifty 50 As of 11:15 a.m. local time, the BSE Sensex was up 0.12%, up 0.1%. The Nifty 50 recorded a decline for the second consecutive week, while the Sensex ended last week lower. Year-to-date, the Nifty is up over 9% and the Sensex is up over 8%.
The benchmark 10-year Indian government bond yield fell slightly to 6.595%.
— Nur Hikma MD Ali
very soon
December 19: Minutes of the December Monetary Policy Meeting. Weekly foreign exchange reserve data
December 22: Gujarat Kidney and Super Specialty IPOs open
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