By Amitendu Palit, Senior Research Fellow and Research Lead (trade and investment), Institute of South Asian Studies, National University of Singapore
A joint statement released by the US and India confirm that they reached an interim agreement on the framework for reciprocal and mutually beneficial bilateral trade. The statement suggests this as the first step towards both countries working out a broader bilateral trade and investment agreement (BTA), for which negotiations began on February 13, 2025.
For India, the immediate prospects do not appear very encouraging. However, if certain enabling conditions are created by the BTA, then there are prospects of considerable long-term gains.
Most Indian exports will face tariffs of most-favoured nation (MFN) plus 18% in the US market. Thus, Indian exports will broadly be facing as much tariffs as most of their competitors from Southeast and South Asia with marginal differences. Compared with just the MFN tariffs that existed in February 2025, when India and the US launched negotiations, the eventual tariffs are much higher.
India, however, can derive satisfaction from potential tariff removals on several exports to the US that are currently attracting Section 232 tariffs on national security grounds. These include those on aircraft and aircraft parts, as well as automotive parts, with the latter subject to a tariff rate quota. The statement also provides hope for future removal of tariffs on Indian exports of generic pharmaceuticals. Furthermore, more tariff cuts are possible in the medium term, with the US affirming its intent to consider India’s similar request during the future negotiations on the BTA.
India has committed to buying $500 billion worth of products from the US, including energy, aircrafts and aircraft parts, precious metals, technology products, and coking coal. The purchase will be over the next five years. The commitment translates into an annual average Indian import of $100 billion. It suggests a doubling of annual imports from their current value of just under $50 billion.
There is short- and long-term consequences of India’s commitment. The former are damaging, while the latter are more encouraging.
At the outset in the short term, the commitment is likely to result in an increase in overall volume and value of imports for the country, leading to higher goods trade deficit and current account deficit. This can be avoided if higher imports from the US substitute imports from other countries. Such possibilities might exist for certain energy products, especially coking coal.
However, volatile global energy prices might result in much more expensive energy imports by India from the US, leading to damaging economic impacts. The sharp slide of the Indian rupee against the US dollar will accentuate the impact.
On the other hand, it is important to note that most of the imports from the US are unlikely to replace India’s imports from China, especially electrical equipment, machinery, and chemicals. With imports from China staying where they are, at around $125 billion, higher imports from the US will enlarge overall trade deficit.
Over time, however, India’s imports from the US can impart a different structural character to the Indian economy and enlarge its global comparative advantages.
As India increases its imports of graphics processing units (GPUs), which are widely used for artificial intelligence (AI) applications and machine learning, they would help in accelerating the speed of AI adoption in India. But this is contingent on the US withdrawing restrictions on import of top-tier AI GPUs by India. If such restrictions stay in place, India’s absorptive capacity to import will also remain limited.
Import of products widely used by large-capacity data centres would help in faster growth of such centres in India. It is noteworthy that Google has already invested heavily in building data centres in India. More investments for AI and data centres have been encouraged through specific incentives announced in the latest Budget.
These include a 21-year tax holiday for foreign businesses using Indian data centres for providing cloud services to global customers, and a 15% “safe harbour” for resident entities providing data-centre related services for global customers. These incentives can now motivate US AI businesses to look very closely at India, especially at a time when most of them are looking to secure returns on the large funds they have invested in developing AI innovations.
The above scenario fits well with India’s long-term plans to grow into an AI hub. It also creates possibilities for India becoming a key regional centre for serving global clients from its domestic capacities. The prospect augurs well for the growth of digitally delivered service exports from India. India is currently the fourth largest exporter of such services with exports being more than $250 billion, contributed in large measure by the global capability centres in India.
Materialisation of this optimistic scenario entails heavy engagement of US big tech with the Indian economy. There are a couple of caveats here. As the joint statement suggests, “discriminatory and burdensome practices” and barriers to digital trade maintained by India will need to go. India might have to further align its domestic data protection rules with those that are enabling for US big tech. Moreover, as suggested by the statement, the speed with which the US and India align their standards and conformity assessment procedures for technology products will also determine prospects.
The content and intent of the statement of the interim US-India trade deal framework suggest higher costs for India in the short run. However, there are plausible long-term benefits if future negotiations on the BTA create enabling conditions for making India a global AI hub and a global leader in digitally powered and tech services.