India–US Trade Deal 2026

Source:  The Hindu 

Why in News? 

The US has slashed the effective tariff on Indian goods to 18%, down from a staggering peak of 50% (which included punitive duties). The deal marks a strategic de-escalation of trade tensions and reaffirms India's role as a primary US ally and a critical counterweight to China in the Indo-Pacific.

What are the Key Highlights of the India-US Trade Deal? 

Tariff Reduction: 

• The US has reduced the reciprocal tariff on Indian imports from 25% to 18%.  
  • Crucially, the additional 25% punitive tariff (imposed in August 2025 due to India's purchase of Russian oil) has been effectively removed, bringing the total effective tariff down from roughly 50% to 18%. 

India's Commitments: 

• Energy Shift: India has agreed to halt/significantly reduce the purchase of Russian crude oil.  
  • India will pivot its energy procurement to the US and potentially Venezuela. 
• Market Access: India is expected to reduce its tariffs and non-tariff barriers on US goods to "zero".  
  • The US expects a surge in agricultural exports (tree nuts, cotton, and soybean oil) to India's massive consumer market. 
• "Buy American" Policy: India has committed to a stronger "Buy American" stance for government and large-scale industrial procurements.  
  • India could buy as much as USD 500 billion worth of US energy, coal, technology, agricultural and other products.

Background of India-US Tariff Evolution 

The road to the 18% tariff was marked by aggressive "transactional diplomacy": 

• The "Tariff King" Narrative: US historically criticized India's high import duties. In mid-2025, the US imposed a 25% reciprocal tariff, matching India's average rates. 
• The Russian Oil Friction: Following India's continued purchase of Russian crude during the Ukraine conflict, the US added a 25% punitive "extra duty" in August 2025, pushing the total tariff to 50%. 
• Operation Sindoor & Regional Leverage: The US reportedly used tariff pressure as a strategic tool for regional stability following India's Operation Sindoor (May 2025) against terrorist targets in Pakistan, later claiming that trade leverage helped push a ceasefire. 
• India's Pre-Deal Moves: To thaw relations, India had already slashed duties in its Union Budget on items like heavy motorcycles and bourbon whisky, and passed the SHANTI Act, 2025 to open up the nuclear power sector.

India-US Trade Relations

• In FY25, the bilateral trade between India and the US stood at a record USD 132 billion as against USD 119.71 billion in FY24. In FY25, India had a trade surplus of USD 40.82 billion with the US.  
  • India's imports from the US mainly comprised mineral fuels and oils, precious and semi-precious stones and metals, nuclear reactors and machinery, and electrical equipment. 
  • India's exports to the US were led by electrical machinery, precious and semi-precious stones and metals, pharmaceutical products, machinery and mechanical appliances, mineral fuels, and iron and steel articles. 
• US is the 3rd largest investor in India with cumulative FDI inflows of USD 70.65 billion from 2000–2025. 
• The US-India COMPACT was launched in 2025. Under this framework, the 'Mission 500' initiative was introduced to increase bilateral trade to USD 500 billion by 2030, supported by negotiations for a Bilateral Trade Agreement (BTA).

What is the Significance of India-US Tariff Rationalization? 

For India: 

• Boost to Indian Exports: The reduction to 18% restores competitiveness for Indian exporters. Sectors like textiles and apparel and pharmaceuticals are expected to see an immediate revival in orders. 
• Competitive Edge: At 18%, India now faces a more favorable rate than regional competitors like Vietnam (20%), Bangladesh (20%), and China (30-35%). 
• Economic Stability: The deal removes the uncertainty of a trade war, likely stabilizing the Rupee and encouraging FDI back into Indian manufacturing. 

For US: 

• Nuclear & Tech Exports: The deal paves the way for US companies to enter India's nuclear power sector (enabled by the SHANTI Act, 2025) and defense manufacturing, deepening the "US-India Initiative on Critical and Emerging Technology (iCET)." 
• Data Center Dominance: Tax holidays for foreign companies setting up data centers in India directly benefit US tech giants like Google, Microsoft, and Amazon. 
• Energy Exports: With India pivoting away from Russia, the US energy sector (oil, LNG, coal) gains a massive, long-term customer, directly benefiting US shale oil producers and LNG exporters.

What are the Challenges of the India-US Trade Deal 2026? 

• Strategic Autonomy: Halting Russian oil strains ties with India's largest defence supplier; challenges India's de-hyphenated foreign policy. 
• Transactional Diplomacy: Every strategic concession may demand a massive economic or political "payback" — a dangerous precedent. 
• China Retaliation: India's dependency on Chinese Rare Earths and APIs makes it vulnerable to retaliatory trade barriers. 
• Regional Parity Gap: Bangladesh and Vietnam retain ~5% GSP advantage India lost in 2019 — the playing field isn't fully level. 
• Economic Risks: Zero-tariff US agri-imports threaten rural livelihoods; switching from discounted Russian oil widens CAD. 
• Technical Barriers: US SPS standards remain hidden walls for Indian food and pharma exports; IPR alignment may raise healthcare costs. 
• Digital Trade: US demand for "free data flow" conflicts with the DPDP Act, 2023 and India's national security framework.

What are the Legal Provisions in Reference to the India-US Trade Deal? 

• WTO — Most Favoured Nation (MFN) Principle (GATT Article I):  
  • If India reduces tariffs to "zero" for US goods, it must extend equivalent treatment to all WTO members — unless the BTA qualifies as a Free Trade Area or Customs Union under GATT Article XXIV. India must ensure the BTA meets the Article XXIV requirements (covering substantially all trade; eliminating duties within a reasonable time) to avoid a WTO challenge from third countries. 
• WTO Agreement on Agriculture (AoA):  
  • Places binding disciplines on domestic support, export subsidies, and market access for agricultural products. India's Aggregate Measure of Support (AMS) commitments and Special Safeguard provisions must be preserved in any agricultural market-opening under the BTA. 
• TRIPS Agreement:  
  • Sets minimum standards for intellectual property protection. The BTA must not impose TRIPS-Plus obligations that exceed India's multilateral commitments without parliamentary approval, particularly on pharmaceutical patents and data exclusivity. 
• WTO Agreement on Sanitary and Phytosanitary Measures (SPS Agreement):  
  • Governs food safety and plant/animal health measures. US SPS standards function as Non-Tariff Barriers for Indian food exports; the BTA should include mutual recognition or harmonisation provisions to provide Indian exporters genuine market access gains beyond mere tariff reductions.

How to Leverage the 'Indo-US Trade Pivot' for Viksit Bharat? 

• Accelerate Green Hydrogen Mission and SMRs for energy security without fiscal slippage. 
• Fast-track FTAs with Gulf nations and East Asia to reduce over-dependence on US buyers. 
• Calibrate "zero tariff" carefully; finalize BTA with harmonised regulatory standards to attract FDI. 
• Use 18% tariff window to shift from assembly to Deep Manufacturing — attract China-exiting supply chains under "Make in India." 
• Adopt product-specific agricultural safeguards; promote value-added agri-exports over raw commodities. 
• Leverage iCET for AI, space, and semiconductor collaboration; retain public-interest IPR waivers in pharma.

Conclusion 

The 18% tariff is a "Strategic Window." India's success will depend on its ability to use this period of American favour to build a self-reliant manufacturing base (Atmanirbhar Bharat) that can eventually compete globally — even if the geopolitical winds shift again. The legal architecture underpinning the deal — from Article 73 and Article 253 of the Constitution to the Customs Tariff Act, GATT Article XXIV, and the DPDP Act — must be robustly utilised to ensure that India's commitments are implemented with legislative accountability, democratic oversight, and full protection of constitutional rights.