Indo-US trade deal is not just about trade, it matters for growth

The deal shifts the US posture towards India from hostile to neutral, and that matters for growth

The India-United States (US) trade deal, for which a framework for an interim agreement has been agreed, will not lack critics. The Congress party has called it a surrender. A farmers’ organisation has called for protests. Many will pore over the fine print once the details are finalised and argue that the deal is more favourable to the US. 

We need to be clear about a couple of things. First, any nation negotiating a trade deal with the Trump administration must expect the deal to be tipped in favour of the US. President Donald Trump has made it clear that his priority is to reset America’s economic equations with the rest of the world. He is determined to use the economic and military might of the US to do so. 

For the entire post-War period until recently, the US was happy to let the advantage lie with many of its trade partners. It believed that it was economically strong enough to do so. Sharing prosperity with partners, the US believed, would make for world peace and it would also keep the world safe from communism. 

Not anymore. Mr Trump rode to power in 2016 by insisting that the time had come to reorder trade relationships to the benefit of the US. He didn’t quite manage to do so, partly because his initiatives were scuttled by Washington establishment  status-quoists in his Cabinet. In his second term, Mr Trump is determined not to make that mistake. He has filled his administration with loyalists who will faithfully execute his orders. 

Last July, Mr Trump reiterated his perception of where matters stand. He said in a post, “The United States of America has been ripped off on TRADE (and MILITARY!), by friend and foe alike, for DECADES. It has come at a cost of TRILLIONS OF DOLLARS, and it is just not sustainable any longer — And never was!” In any trade deal, therefore, it will be Advantage US. 

Second, we must be clear that the overall relationship with the US is contingent on arriving at a trade deal that America approves. Not doing a trade deal means courting US hostility across the board. In negotiating a trade deal with the US, every nation faces a choice: Does it want the US to be a friend or a foe? 

Mr Trump’s trade deal with the European Union is an excellent illustration of the two points made above. For the EU, the issue was not just access to the vast American market. It was also American support to Europe in the Ukraine conflict, including the supply of critical weaponry and intelligence and America’s involvement in the North Atlantic Treaty Organization (Nato) itself. Faced with the prospect of jeopardising its defence relationship with the US, the EU settled for terms that were widely seen as humiliating. 

The EU now faces a baseline 15 per cent tariff on its exports to the US. In addition, steel, aluminium and copper exports from the EU will face a 50 per cent tariff. Car exports would be subject to a quota.  The EU has also agreed to buy an additional $750 billion in US energy products over the next three years and make investments worth $600 billion in the US by 2029. The EU, for its part, will eliminate tariffs on imports of all US industrial goods and provide preferential access to a wide range of US seafood and agricultural products.  A more abject surrender is hard to visualise. Mr Trump has likewise signed deals with the UK, Japan and South Korea — all close allies of the US —that are conspicuously one-sided. 

The lesson for India is that the Indo-US trade deal is not just about access to the US market. India has weathered Mr Trump’s 50 per cent tariff on Indian exports much better than expected. India’s total exports are up 4.4 per cent year on year despite Trump’s tariffs. Nor have exports to the US suffered — they are up 9.8 per cent in April-December 2025. 

The problem for India is that capital flows are flagging. This is happening at a time when India’s current account deficit of 1.3 per cent of gross domestic product (GDP) compares favourably with that of a range of countries, including Canada, the United Kingdom and Australia, as the latest Economic Survey notes. India had no difficulty financing current account deficits of a much higher magnitude in the post-reform era. Today, we are hard-pressed for capital inflows, and the rupee is under pressure despite a highly favourable set of economic indicators. That is not something to be treated lightly. 

Gross foreign direct investment (FDI) fell marginally by 2 per cent in calendar year 2024. This may be in line with the general decline in FDI flows in recent years but it does not help us at all. At the same time, outward FDI from India as well as repatriation of profits by foreign firms in India have increased sharply. As a result, net FDI in April-November 2025 was a mere $5.6 billion. The bigger problem at the moment is with foreign portfolio inflows (FPI). It was (-) $3.9 billion in April-December 2026. 

There could be many reasons why FPI inflows have turned negative. You can be pretty sure, however, that the orientation of the US administration towards India is an important factor. When India is subject to a punitive tariff regime by the US, fund managers are unlikely to view India as a good place to invest in. The Treasury department houses individuals, including the Treasury Secretary, with strong links to Wall Street. They are known to work the phone lines with fund managers on a range of matters. 

Absent a trade deal, therefore, we must reckon with rough weather in respect of capital flows, however good our macroeconomic indicators. And who knows that services exports to the US will not be subject to punitive action as well? Also at risk are defence collaboration, technology transfers and the entire strategic partnership that has been built over the past two decades. Thus, India’s strong economic performance in the present year is no assurance that it can be sustained in the absence of an Indo-US trade deal. 

The point about the Indo-US trade deal is not that it involves compromises, such as cutting back on oil imports from Russia or scaling up imports of goods from the US to $100 billion annually for the next five years. It is also not just about getting a tariff rate of 18 per cent, one that is lower than that of many of our competitors. The substantive point is that it moves the US posture towards India from hostile to neutral. That is good news for the Indian economy. 

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