US Tariff Reduction Offers Respite, But India Must Navigate Trade with Caution
The recent announcement by US President Donald Trump of a trade deal with India, following closely on the heels of the landmark India-European Union agreement, has sparked both relief and skepticism. While the easing of tariffs is a positive development, it comes with significant caveats that demand strategic foresight from Indian policymakers.
Details of the US-India Trade Announcement
Publicly available information indicates that the United States has slashed its total tariff on Indian goods from 50 percent to 18 percent. This includes the removal of a punitive 25 percent tariff imposed in August 2025, which was a response to India's purchases of Russian oil. Additionally, the baseline reciprocal tariff has been lowered from 25 percent to 18 percent.
In return, India has reportedly committed to halting purchases of Russian oil, opting instead to source oil from the United States and potentially Venezuela. India has also pledged to reduce tariffs and non-tariff barriers on American goods to zero and committed to purchasing over $500 billion worth of US energy, technology, agricultural products, and coal, though no specific timeline has been provided.
The Statutory Warning in US Engagement
Any reduction in tariffs and restoration of predictability is undoubtedly good news for Indian exporters, who have faced significant challenges. The US remains India's most important single-country trading partner, especially when services are factored in. However, engagement with the US now carries a statutory warning due to the demonstrated volatility of its trade policy.
President Trump's approach has shown a disdain for rules-based trade systems, with deals often announced via social media and subject to sudden changes. Examples abound, such as the EU oscillating between strategic partner and target, and figures like Elon Musk learning that proximity offers no immunity. No deal, however grandly announced, is safe from executive impulses that undermine institutional stability.
The Importance of Institutional Reliability
Modern economic theory emphasizes that institutions matter profoundly for growth. Stable rules, credible commitments, and constraints on executive discretion reduce uncertainty and encourage investment. The current US administration's tendency to rewrite trade policy by fiat represents an antithesis to this model, creating a world where hedging and diversification are prudent strategies.
This context underscores the significance of India's recent trade agreement with the European Union. While Europe can be fractious and negotiations lengthy, it respects institutions and operates on a more rule-based framework, making it less prone to unilateral economic measures. For India, this deal represents a conscious trade-off: accepting regulatory friction in return for predictability and institutional reliability.
India's Strategic Course Forward
India's path is clear: engage with the US and accept the respite offered by tariff reductions, but simultaneously maintain and deepen relationships with other major economies. The Union Budget's focus on promoting labor-intensive manufacturing, such as textiles and apparel or gems and jewellery, is crucial, especially after the damage from previous high US tariffs. The removal of punitive tariffs will help level the playing field against competitors like Bangladesh and Vietnam.
Continued investment in the EU relationship is essential for diversification, providing a buffer against the unpredictability of US trade policy. As noted by economist Daron Acemoglu, good institutions are fundamental to long-term development, and India must prioritize building robust economic frameworks.
In summary, while the US tariff easing is a welcome development, India must navigate this engagement with caution, emphasizing diversification and institutional strength to ensure sustainable economic growth.
