Details of the agreements reached during Indian Prime Minister Narendra Modi’s recent visit with US President Donald Trump have not yet been made public. But judging by the two leaders’ joint press conference following their talks, it appears Modi struck a deal that may not be in India’s broad economic and strategic interests.
Indeed, while politically symbolic, the personal bonhomie between Modi and Trump may come at a high cost for India in the short, medium and long term.
First, India and the US have agreed to increase their current trade volume of US$190 billion to 500 billion within the next five years. While this target may seem ambitious and beneficial to India at first glance, it is not necessarily advantageous for India.
Unlike the preferential terms the US extended to China in the 1990s, this agreement includes imposing reciprocal tariffs to reduce the US trade deficit. In 2023, India exported $83 billion of goods to the US while it imported $40 billion worth.
In services, India exported $36 billion and imported $29 billion, resulting in a trade surplus of around 50% in India’s favor. However, introducing a reciprocal tariff means the US will impose the same duties on Indian goods as India does on American products.
This move effectively ends India’s preferential treatment as a developing nation under World Trade Organization (WTO) rules. As a result, the price of Indian goods and services will increase in the US, and conversely, the price of American products will be cheaper in the Indian market. This shift will likely overturn India’s trade surplus with the US, leading to considerable economic losses for India.
Second, Trump announced that India would reduce tariffs and increase imports of American goods, including defense equipment, oil and gas, to address the US’s trade imbalance. Under this agreement, India must import more oil and gas from the US.
Historically, India has relied on Iraq, Russia, Saudi Arabia, and the United Arab Emirates for its oil imports. Following the Russia-Ukraine war, India significantly increased its oil purchases from Russia, which accounted for 40% of its total imports in 2022 and still stands at around 35%.
India has been buying Russian crude oil at prices significantly below market rates. In contrast, importing oil from the US will come at market prices, with shipping costs double those from Russia and the Middle East.
Indian refineries must add to their plants to refine American crude oil, incurring additional costs. These factors are likely to escalate oil prices considerably, exacerbating inflationary pressures, as most of the logistic costs directly rely on oil prices in India.
Third, Trump revealed that the two sides agreed to a 10-year defense partnership. While ostensibly aimed at strengthening their strategic partnership, it also appears designed to tilt the trade balance further in America’s favor.
The agreement includes provisions for co-producing primary weapons in India but the high production costs of private US defense manufacturers will make this arrangement less favorable for India.
Additionally, the US plans to export military hardware such as anti-tank missiles and F-35 stealth fighter jets to India to replace the cheaper Russian equipment India currently relies on with significantly more expensive American alternatives.
While framed as part of a strategy to counter China’s global influence, these weapons are considered older-generation and less efficient than China’s advanced systems. Moreover, their effectiveness has been called into question by the evolving nature of modern cheap battery-powered drone warfare, as seen in the Russia-Ukraine conflict.
Fourth, the two countries have agreed to advance with a civil nuclear energy deal signed 16 years ago. This agreement will export US-designed atomic reactors to India for civilian use. However, these reactors have long been criticized in India as outdated and costly.
At a time when China, India’s regional rival, is developing fourth- and fifth-generation reactors, India is importing second-generation technology from the US. Given the rapid advancements expected in fission and fusion nuclear reactor technology post-2035, this deal offers little benefit to India beyond helping to balance the US trade deficit.
The implications of these agreements are likely negative for India across all time horizons. In the short term, the Indian rupee is likely to weaken further as imports from the US increase, exacerbating inflationary pressures in India. Modi has already faced criticism in the Indian Parliament for the rupee’s depreciation against the US dollar.
In the medium term, while American products such as electronics, garments and footwear may become cheaper, flooding the Indian market, most Indians—particularly lower-middle-class and poor households—will struggle with declining purchasing power.
Indian farmers and small-to-medium enterprises will face severe challenges as they compete with highly subsidized American agricultural and industrial goods.
Modi’s “Atmanirbhar Bharat” (self-reliant India) initiative risks being undermined in the long term as Indian goods are forced to compete with cheaper American imports. Introducing reciprocal tariffs will outweigh India’s competitive advantage in terms of its low-cost labor. If Europe adopts similar tariff policies, India’s international trade prospects could deteriorate further.
Does India get nothing? Not quite. There are a few limited benefits. First, US liquefied natural gas (LNG) imports are priced competitively, making it slightly cheaper than gas from West Asia. Second, the US has approved the extradition of Tahawwur Rana to India. Modi can tout this as a significant victory domestically, given Rana’s involvement in the 2008 Mumbai attacks.
However, these gains will be overshadowed by the broader economic and strategic concessions India must make. Modi will need to recalibrate his economic and trade policies, mainly by reducing tariffs on US goods and services and increasing imports, to meet the demands of his “friend” Trump.
These adjustments starkly contrast with Modi’s strategy during Trump’s first administration when he sought to intensify India’s strategic partnership with the US in the hope that an exodus of factories would relocate from China to India.
In Trump’s second term, however, the balance of gains and losses appears skewed in America’s favor, with India likely to lose more than it stands to gain.
Bhim Bhurtel is on X at @BhimBhurtel
India is trying to be best friends with both Russia and the USA at the same time. The danger of sitting on the fence is that you might give yourself an almighty “wedgie”.