This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse. Subscribe here.
The big story
India-U.S. relationship looked set to reach new heights at the start of 2025.
Prime Minister Narendra Modi was among the earliest foreign leaders to meet the newly elected U.S. President Donald Trump in February, just hours after he signed a plan to introduce “reciprocal tariffs.”
The optics were powerful as the leaders of the world’s largest and oldest democracies shook hands, and vowed to double bilateral trade to $500 billion by 2030, with Modi stating, “Our teams will work on concluding very soon, a mutually beneficial trade agreement.”
Cut to December, and India is among the highest tariffed countries in the world — levies that dwarf even those on China, which had been in Trump’s crosshairs during his election campaign.
WASHINGTON, DC – FEBRUARY 13: U.S. President Donald Trump and Indian Prime Minister Narendra Modi meet in the Oval Office at the White House on February 13, 2025 in Washington, DC.
Andrew Harnik | Getty Images News | Getty Images
India and U.S. have “strong economic incentives” to reach an agreement, said Sonal Varma, Nomura’s chief economist, India and Asia ex-Japan. The U.S. needs reliable supply chain partners outside China, and India offers scale and capability while New Delhi needs market access to Washington to sustain its export-led growth ambitions, she said.
Yet, negotiations appear to have hit a wall. A U.S. trade delegation wrapped up another rounds of talks in New Delhi last week, with no breakthrough, though U.S. Ambassador to India Sergio Gor described a call between Modi and Trump as “great.”
“I think the biggest roadblock is political will,” said Mark Linscott, former assistant U.S. trade representative and senior advisor at U.S.-India Strategic Partnership Forum, adding that “tariffs and agriculture are always difficult.”
He suggests that one of the ways to get Trump on board would be with a “big gesture” such as an “offer to purchase U.S. fuel ethanol or sustainable aviation fuel.”
While the U.S. seeks to improve its trade balance with the world’s fastest growing major economy by increasing sales of energy and farm products, India has only partially agreed on the energy sourcing front and has been resisting access to the politically sensitive farm sector.
“There’s resistance in India to certain row crops and other meats and products,” U.S Trade Representative Jamieson Greer told the Senate earlier this month, adding “they’re [a] very difficult nut to crack.”
Thorny issues
India has been under pressure from the U.S. to cut back on its imports of Russian oil as Washington claims this enables Moscow to withstand pressure of economic sanctions by the West and continue its war against Ukraine.
In August, the U.S. imposed an additional 25% tariff on Indian imports, raising total duties to as high as 50%, to deter to New Delhi from buying Russian oil.
While the U.S. has acknowledged that New Delhi has cut back on oil imports from Russia, during his visit to India earlier this month President Vladimir Putin said Moscow was willing to provide “uninterrupted shipments of fuel to India.”
India has officially not stated that it would cut back on oil shipments from Russia.
“Our energy sourcing is dependent on the dynamics in the global market, as also the imperative for us to provide energy at affordable rates to our 1.4 billion people,” the foreign ministry said earlier this month, refusing to intervene on oil sourcing by private refiners.
Reuters reported on Wednesday that Indian refiners resumed buying oil from Russian companies that were not part of U.S. sanctions in November and who are “offering deep discounts.”
While experts believe a peace deal between Russia and Ukraine, putting an end to the conflict, would annul the 25% “punitive” tariffs on India, giving the U.S. access to the agriculture market would remain a major sticking point, holding back a trade deal.
Varma of Nomura said that agriculture was the “primary stumbling block” as the U.S. wants India to buy genetically modified crops and allow dairy exports – both face strong opposition from the country’s domestic farm lobby, which wields significant political influence.
This gains further significance as more major Indian state elections are due next year, such as in West Bengal, Tamil Nadu, and Kerala, which have strong farming lobbies, followed by Uttar Pradesh in 2027 — the country’s largest agricultural state.
Bearing the cost
While New Delhi and Washington are negotiating for a mutually beneficial deal, the delay is proving expensive.
“A prolonged absence of the deal does have real economic implications,” said Pradeep Gupta, chairman and managing director of Anand Rathi Share & Stock Brokers, adding that capital flows due to “significant volatility,” also reflected in a weakening rupee, were an immediate concern.
The absence of a trade deal keeps markets “somewhat cautious,” especially when it comes to sectors that are “dependent on the U.S.,” said Gupta, adding that the moment there is clarity on the trade front, there will be “meaningful reduction in uncertainty premiums.” In other words, Indian equities could see a sharp rally.
His firm estimates that a 50% duty could shave about 0.5 percentage point off India’s GDP growth, with a meaningful impact on export volumes. Goldman Sachs expects the Indian economy to be impacted by 0.6 percentage points due U.S. tariffs.
India’s exports saw a sharp fall in October, though they have mostly been on an upward trajectory despite the tariffs coming into effect.
“India has weathered the shocks of the 50% tariffs quite well,” and has managed to workaround them, but in the end the U.S. remains a top export destination for Indian products,” Michael Kugelman, Atlantic Council’s senior fellow for the South Asia region, said on CNBC’s “Inside India.”
“India is going to have to make some politically risky decisions,” he said, adding that it was still unclear if there would be a deal anytime soon.
The absence of a trade deal with the U.S. “has been a serious overhang on India,” Citi’s chief India economist, Samiran Chakraborty, said last week, while discussing India’s prospects for 2026.
Meanwhile, experts in the U.S. say that tariffs are accentuating the affordability problems for families across the U.S by contributing to inflation.
“Those punitive tariffs [on India] harm U.S. consumers who will spend more on a wide range of goods,” said Wayne Winegarden, senior fellow in economics at the Pacific Research Institute.
“The arbitrary, unnecessary, and pointless trade war created by President Trump is creating difficulties for the U.S.-Indian relationship,” said Winegarden, warning that this deterioration of the relationship is bad for both countries.
To foot the bill for President Trump’s new tariffs, some small U.S. businesses are taking on high-interest rate loans and other forms of debt, with several business owners warning they fear a financial disaster.
Analysts from India also say that American importers of pharmaceuticals, machinery, and even consumer goods, are experiencing higher input costs and supply-chain friction.
But, despite all the economic reasoning in favor of a trade deal, talk of India being an “important strategic partner” and Prime Minister Modi being “a great friend,” experts do not see great progress toward an agreement as the year ends.
“[At] the beginning of the year we thought India will be the first country to get a trade deal, and now end of the year, it is the last country which has not got a trade deal,” Citi’s Chakraborty said.
Will the New Year bring fresh ideas from both sides to the table? Watch this space.
Top TV picks on CNBC
Rajiv Batra, head of Asia equity strategy and co-head of global EM equity at JPMorgan, said his firm is overweight on Indian equities and expects earnings recovery and potential double-digit growth in the upcoming quarters.
Ajay Sahai, director-general and CEO of the Federation of Indian Export Organisations, said that about 50% India’s exports are still insulated from tariffs despite the lack of a U.S.-India trade deal, and that exporters are still largely absorbing the costs as they wait for levies to ease.
Michael Kugelman, Atlantic Council’s senior fellow for the South Asia region, said that Prime Minister Narendra Modi’s visit to Jordan, Ethiopia and Oman was an opportunity to bolster commercial ties as India faces trade uncertainty with the U.S.
Need to know
India’s goods exports rise in November. Exports in November rose 19% on year to $38.13 billion, with sharp improvement in the country’s trade with the U.S. The country’s merchandise trade deficit, which had touched a record high of roughly $41.7 billion in October, shrank to $24.5 billion in November, beating analysts’ estimates.
Inflation rises in November. Consumer inflation rose to 0.71% in November, accelerating from an all-time low of 0.25% in the prior month, due to rises in the price of 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 72.80 billion rupee ($805 million) incentive scheme to promote domestic manufacturing of rare earth permanent magnets, as India looks to reduce its dependence on imports.
Quote of the week
Right now, the most recent estimates show that India lost about $250 billion in just 2024 as a result of air pollution … we may not walk the pavement and do as much shopping, people may avoid Delhi, because, from a tourism perspective, [it is] so incredible.
— Gaurav Gupta, global managing partner, Dalberg Advisors
In the markets
On Thursday, India’s Nifty 50 was up 0.12%, while the BSE Sensex had gained 0.1% as of 11:15 a.m. local time. The Nifty 50 has clocked two straight weekly declines, while the Sensex ended lower last week. Year-to-date the Nifty has has gained over 9%, while the Sensex is up over 8%.
The benchmark 10-year Indian government bond yield fell slightly to 6.595%.
— Nur Hikmah Md Ali
Coming up
Dec. 19: December monetary policy meeting minutes; weekly forex reserves data
Dec 22: Gujarat Kidney and Super Speciality IPO opens
Each weekday, CNBC’s “Inside India” news show gives you news and market commentary on the emerging powerhouse businesses, and the people behind its rise. Livestream the show on YouTube and catch highlights here.
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