Breaking the glass wall: Why the India-US trade deal works for India

The India-US trade agreement should be seen as a win for consumers and producers, with debates on protectionism and strategic autonomy often missing the economic trade-offs involved

The recently announced India–US trade deal has led to much confusion regarding the terms of the agreement and its implications for both consumers and producers. In February 2020, one of the authors had termed this as an eventuality given the complementarities of the two economies. Little did we imagine that the deal would take six more years.

 

But all is well that ends well. As proponents of this deal, there is little suspense regarding our views on it. The deal is good — for both countries. However, as often happens, many are questioning the agreement and invoking passionate phrases such as “strategic autonomy” to challenge it. In what follows, we provide some insights into how the deal would benefit Indian consumers and producers and strengthen the economy.

 

 

Lastly, we discuss the issue of oil purchases, since that has become the primary yardstick used to judge whether India enjoys strategic autonomy. The idea behind this piece is to carefully examine trade and explain why we are at a critical moment in history, and why vested interests should not contaminate the discourse.

How do Indian consumers gain from freer trade?

Let us begin with a simple comparison of India pre-1991 and post-1991. India historically followed a highly protectionist trade regime that restricted access to the domestic market. Ambassador and Fiat cars were the only options available to Indian consumers. Ambassadors truly served as brand ambassadors of stasis — no innovation, no progress, the same car delivered year after year. Gradually allowing more players expanded consumer choice and lowered the cost of car ownership. The same story holds true for virtually all major sectors of the Indian economy.

 

Young India is aspirational, and consumers demand the best possible products at a given price point. Some of these may be European, others American. Protectionism in the form of tariffs is nothing but a tax on aspirations. We welcome the fact that the government has concluded trade agreements with many countries and has either withdrawn tariffs or significantly reduced them. In that regard, if India does offer lower tariffs for American goods, it effectively delivers a consumption tax cut for Indian consumers, who ultimately bear the burden of tariffs. Greater choice and stronger competition will help reduce prices, benefiting aspirational India the most.

 

Dry fruits from the US, for instance, attract a hefty tariff even though the US is India’s primary supplier. Our grandmothers often recommend having five soaked almonds every morning. Reducing these tariffs would surely make them happier.

 

For decades, the Indian consumer has lived behind a ‘glass wall’. We could see the innovation, safety standards and nutritional variety available elsewhere, but our own trade policies made them untouchable. Protectionism turned global staples into luxury icons. By lowering these barriers, India is not just signing a trade deal; it is finally shattering that glass wall, allowing aspirational Indians to participate in global standards of living rather than merely observe them.

What about Indian producers?

Some now ask what happens to Indian businesses that must compete with US firms. Here too, the evidence favours trade. Most Indian businesses, especially micro, small and medium enterprises, stand to benefit from new opportunities through improved access to US markets. A zero per cent tariff on Indian goods was never realistic, as no country receives such treatment. The lowest achievable rate was around 18 per cent, slightly below that faced by India’s competitors. The deal delivers precisely this, reaffirming commitments to supply-chain diversification.

 

India offers scale, manufacturing capacity and a large workforce, allowing firms to relocate or expand production here. Preferential access to the US market will naturally benefit Indian producers. The additional growth momentum created will also support firms focused primarily on domestic demand.

 

For over a decade, India has grappled with weak private investment. Successive governments have tried various measures to encourage capital expenditure. Protectionism, however, allowed firms to operate outdated plants without pressure to invest. The renewed need to compete and improve efficiency could lift private investment, generate employment and expand India’s middle class over the coming decade.

What about India’s strategic autonomy?

Having established that the agreement benefits consumers and producers, we turn to the question of strategic autonomy. Many have erroneously linked it to the purchase of oil from one country.

 

Before the war in Europe, India’s energy basket looked very different. By 2020, the US had emerged as an important energy supplier. When oil prices spiked, India understandably sought cheaper alternatives. Strategic autonomy is not about buying oil from a particular country, but about sourcing energy at the most attractive prices. Over the past year, energy prices have moderated significantly, and India’s energy mix should reflect that reality.

 

Moreover, trade deals are always part of a broader package. With lower energy prices and reduced discounts, diversifying India’s energy mix carries little cost while delivering preferential access to one of the world’s largest markets. The economic arithmetic, here too, clearly favours the deal.

 

Economics is about trade-offs, and true win-win outcomes are rare. The complementarities between the Indian and US economies make this agreement possible. These same complementarities led us in 2020 to believe such a deal was inevitable — only the timing was uncertain. Now that it is in place, it is worth recognising that both economies stand to gain substantially from deeper trade ties linking the world’s oldest and largest democracies. 

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(Prakash Loungani is Programme Director in the Master’s in Applied Economics at Johns Hopkins University. Karan Bhasin is a New York-based economist and Non-Resident Fellow at ORF America. They co-teach a course on economic growth at Johns Hopkins University.)

 

Views expressed are personal