How India has orchestrated a reset in its trade ties

There are decades where nothing happens; and there are weeks where decades happen.” The comment by Vladimir Lenin, the architect and founder of Soviet Russia, is a perfect summation of the recent developments in India. The week from January 26 to February 2 saw the Indian economy surmount long-pending and seemingly intractable challenges. First came an agreement for a trade deal with the 27-member European Union (EU), punctuated by the presentation of the Union Budget 2006-27 on February 1, capped by a late-night tweet from US President Donald Trump on February 2 announcing a trade pact that will lower tariff on specified Indian goods from a staggering 50% to 18%. The three developments—the India-EU FTA, a Union Budget focussed on growth and capacity building, and the trade pact with the US—are set to brighten India’s economic outlook for FY27. While much will depend on the fine print of the measures and how they are executed, policymakers, economists and industry stakeholders are hopeful these will remove uncertainty and boost investments and economic activity. Prime Minister Narendra Modi said the deals have given the world confidence that it is moving towards stability and will expand opportunities for India’s youth. The US and the EU are the world’s largest economies with a combined GDP of $50 trillion and India’s key export destinations. India’s exports to the US were 2.2% of GDP and to the EU they were 2% of GDP in FY25. “Closer trade ties with the US and the EU could provide a meaningful, though gradual, lift to India’s growth by expanding market access and improving export competitiveness. Beyond trade flows, a more predictable relationship could boost investor confidence and attract export-oriented investments, reinforcing India’s position as an alternative manufacturing and services hub amid shifting global supply chains,” says Upasana Chachra, Chief India Economist, Morgan Stanley. She says the benefits of trade deals are realised over years, contingent on drivers such as implementation, regulatory alignment and capacity building. “Without parallel progress on logistics, standards, and skills, the gains may remain incremental. While both the India-US and India-EU trade deals have the potential to boost India’s economic prospects, their timing, scope and mechanisms will matter for how large the effects are,” she says. Apart from goods, the deals will also benefit services, India’s dominant growth engine, as mobility-related provisions will ensure more visas for students and skilled professionals amid concerns over US restrictions on H1-B visas. The Trigger With trade relations with the US hanging fire after Donald Trump took office as US President for a second term in early 2025, India embarked on a plan to diversify its export markets and basket. Between last July and January, India concluded trade negotiations or signed agreements with as many as five countries, including the UK, Oman, New Zealand, the EU and the US. Besides, the Trade and Economic Partnership Agreement with the four-nation bloc of Switzerland, Norway, Liechtenstein and Iceland came into effect on October 1, 2025. India recently signed the terms of reference for the India-Gulf Cooperation Council FTA. It is not uncommon to find officials in New Delhi’s Vanijya Bhawan, which houses the ministry of commerce and industry, holding back-to-back talks with partner countries to conclude trade deals. India’s strategy, accompanied by a focus on domestic reforms to boost consumption, has paid off. It has managed to shrug off the impact of US tariffs with merchandise exports rising 2.62% between April and November 2025 and 19.4% to $38.13 billion in November 2025. Merchandise exports to the US rose 22.61% to $6.98 billion in November after shrinking for two straight months. Europe Calling The pact with the EU—talks for which started in 2007 and had to be stopped in 2013 due to EU’s withdrawal before being reinitiated in 2016—comes against this backdrop. Policy watchers say the deal was expedited due to global uncertainty from US’ protectionist policies and the need for India and the EU to find stable markets. India’s key labour-intensive sectors such as textiles, apparel, marine, leather, footwear, chemicals, plastics, rubber, sports goods, toys, and gems and jewellery will enjoy zero duty access to the EU from 4-26% at present. The EU will reduce or eliminate tariffs on 98% of India’s exports. Commerce and Industry Minister Piyush Goyal says the deal will lead to massive trade, investment and job opportunities. Merchandise trade between India and the EU was $136.54 billion in FY25. The deal is expected to double it by 2032. Alexandra Hermann, Lead Economist, Oxford Economics, says the effective tariff in the EU averages 3.3%, and so aggregate gains from further cuts are likely to be modest. “Sector-specific benefits, however, could be more significant, particularly for textiles and apparel, which have faced the highest duties of around 10%,” she says. The FTA also secures commitments for key sectors that are India’s strength, including IT and IT-enabled services, professional services, education, financial services, tourism, construction, and other business sectors. Further, it provides a framework for business mobility covering short-term, temporary and business travel. It, however, does not address the contentious issue of the EU’s Carbon Border Adjustment Mechanism under which imports to the EU are being taxed based on carbon emissions since January. They (trade deals) are likely to have a positive impact on India’s trade. The US trade deal is the 20th FTA by India. But the timelines for the deals are to be seen. -Ajay Srivastava,Founder, GTRI While Indian exporters are optimistic about the deal and are receiving enquiries from the UK and the EU, they say the benefits will take at least a year to accrue. Ajay Srivastava, Founder of think-tank Global Trade Research Initiative, welcomes further integration with the world. “They (trade deals) are likely to have a positive impact on India’s trade. The US trade deal is the 20th FTA by India. But the timelines for the deals are to be seen—the UK CETA is yet to be implemented, the EU FTA will take over a year, and we will have to see when the US deal comes into effect,” he says. Pankaj Chadha, Chairman, Engineering Export Promotion Council of India, says the EU deal is still a year away and likely to be operationalised sometime in January-March 2027. The US Deal Of more immediate interest is the US deal that promises to lower the penal tariff of 50% to 18% and place India more favourably than other economies. The high tariff had impacted several labour-intensive sectors, including textiles and gems and jewellery. But about 45% of India’s exports, from sectors such as pharmaceuticals and electronics, are not covered. The US is India’s largest export destination ($86.5 billion in FY25). Now, about $74 billion of India’s exports to the US will have lower tariffs, with goods worth $30 billion at an 18% rate, another $40 billion at nil, and $4 billion already exempt. Only about $12 billion worth of goods, most of which are under Section 232 of the US Expansion Trade Act, including aluminium, steel and copper, will be taxed at higher rates. Following the joint statement by India and the US and an executive order by Trump, tariffs have been reduced to 25% effective February 7, and are set to go down to 18% in another few days. Goyal has called it a fair, equitable and balanced agreement that will make India future-ready, boost exporters and Make in India, protect Indian farmers by safeguarding key interests in agriculture and dairy and benefit consumers. The deal could open opportunities worth $300 billion for Indian exporters, he said. “A formal agreement is being drafted, which may take a month or a month-and-a-half,” he said, adding that it is likely to be signed by mid-March. Commerce Secretary Rajesh Agrawal has said the legal agreement will enable India to reduce tariffs on US goods. When the Budget was presented the uncertainty was very high. The UDEal had just been signed. The Budget maintained continuity and consistency. -Anuradha Thakur,Economic Affairs Secretary As per estimates by BoFA Global Research, in view of the rising share of electronic exports to the US, the effective tariff on India will be 12-13%, assuming that the reciprocal tariffs are stacked on top of the prevailing MFN (most favoured nation) tariffs. For now, the announcement has given domestic industry and exporters a reason to rejoice and catch their breath. Economists expect a boost to growth and investment prospects. Srivastava of GTRI says the average tariff on India by the US was about 2.9% under the MFN clause. It went up to 53% (inclusive of the 50% tariff) and would now be about 21%, he says, noting that this places India at a more competitive position compared to Bangladesh and Vietnam. “However, as part of the BTA, the US has not removed all duties even as India will reduce or eliminate its MFN tariffs on all US industrial goods and on many food and agricultural products,” he says. While the US tariffs on India were much lower in the pre-Trump era, exporters say India will have a fighting chance even with an 18% rate. SC Ralhan, Chairman, Federation of Indian Export Organisations, says exporters are receiving enquiries from the UK, EU and the US and expect a huge rush of orders after February. “The reduction in tariffs by the US is expected to boost exports in sectors, including marine, leather, furniture, engineering goods, apparel and pharmaceuticals. The psychological impact of the tariffs has been high; many buyers moved to other countries,” he says. A Sakthivel, Chairman, Apparel Export Promotion Council, says the deals with the UK, the EU and the US will prove to be a boon for the apparel and textile sector. Most producers are looking to expand to meet the new orders. “A lot of orders had stopped after the 50% tariff. In the UK deal, big stores are already scouting for suppliers,” he says. India’s key exporting sectors, including textile and apparel, gems and diamonds, marine products, pharma, inorganic chemicals, vegetables and fruits would enjoy nil tariff. Significantly, aircraft parts, which have seen a surge of orders from US majors such as Boeing and Airbus, are also now at nil tariff. These companies are now likely to purchase more from India. Manoj Mishra, Partner and Tax Controversy Management Leader, Grant Thornton Bharat for Consumer Products, says the interim India–US trade deal could translate into wider choice for consumers and more competitive pricing. “India’s decision to cut duties on products such as cosmetics, medicines, medical devices, hearing aids, and alcoholic beverages are likely to lower import costs and improve access to global brands and advanced products. At the same time, the US opening its market to processed food items from India, including jams and juices, creates new growth opportunities for Indian FMCG and food brands,” he says. These deals could boost FY27 GDP growth, which is expected in the range of 6.8-7.2%, as per the Economic Survey. Chief Economic Adviser V Anantha Nageswaran says India may grow faster than expected with the reduction in US tariffs.Reserve Bank of India Governor Sanjay Malhotra has said that the India-EU FTA and the prospective India-US trade deal along with several other trade agreements will support exports over the medium term. BoFA Global Research says the deal could increase India’s GDP growth by 20-50 basis points and push its “GDP projections from 6.8% to meaningfully above 7%.” Closer trade ties with the US and the EU could provide meaningful, though gradual, lift to India’s growth by expanding market access and improving export competitiveness. -Upasana Chachra,Chief India Economist, Morgan Stanley Hermann of Oxford Economics says the US deal could add around 0.2 percentage points to GDP growth. “India’s broader export performance has so far taken last year’s tariff hike largely in its stride, helped by a surge in electronics demand. The biggest beneficiaries now should be gems and jewellery, chemicals, and textiles, sectors that saw US shipments drop sharply and are finally getting some breathing room,” she says. Budget Blueprint Beyond the two mega trade deals, Finance Minister Nirmala Sitharaman presented a carefully crafted Union Budget 2026-27 that went beyond short-term goals and unveiled a medium-term strategy to boost growth, build domestic capacity and create jobs. While the Budget may not have announced exciting reforms, it kept the pedal on measures to build self-reliance in emerging and sunrise sectors, support micro, small and medium enterprises that are the building blocks of the economy and India Inc, and prioritised capital expenditure over fiscal consolidation. Economic Affairs Secretary Anuradha Thakur says when the Budget was presented uncertainty was high. “The EU deal had just got signed. The Budget maintained continuity and consistency. We are sharpening focus on more strategic areas,” she says, adding the focus is on infrastructure, services, industry and value addition in agriculture. Capex is estimated at a record level of Rs 12.2 lakh crore in FY27 while the fiscal deficit has been pegged at 4.3% of the GDP from 4.4% in FY26. Expenditure Secretary V. Vualnam says the “target of 4.3% for fiscal deficit is an ideal number, and it should enable us to meet whatever expenditure requirements are there. At the same time, it reflects the government’s commitment to fiscal prudence.” Measures such as income tax exemptions to data centres and toll manufacturing and expansion of safe harbour provisions are expected to give more certainty to foreign investors. Procedural reforms related to customs as well as exemption from basic customs duties for import of goods for lithium-ion cells for batteries, nuclear power projects, capital goods required for processing of critical minerals and components and parts used in civil aviation and defence are also expected to boost investments and domestic manufacturing. Officials say these provisions have nothing to do with US demands but are part of an organic process to improve domestic manufacturing capabilities. Chachra of Morgan Stanley says the Budget signals a calibrated shift in the government’s intent towards strengthening structural levers that can facilitate a sustained and productive growth trajectory. The trade deals with the EU and now the US along with the Budget are expected to improve investor sentiment. But there is need for much more clarity on what happens next with the US. A crucial issue remains India’s purchase of $500 billion worth of US goods in the next five years, including energy products, aircraft and aircraft parts, precious metals, technology products, and coking coal. Apart from Boeing airplanes, India is looking to buy high-tech industrial goods from the US that are needed for producing goods such as semiconductors, chips, high quality machinery at a lower tariff. How such large quantities of imports will impact domestic industry and the overall economy will have to be seen. Trade economist and former JNU Professor Biswajit Dhar says none of India’s trade deals till now have had a compulsory import provision from the partner country. “This rankles. FTAs should allow market forces to play out,” he says. The compulsory imports of $100 billion annually from the US will impact domestic manufacturing and agriculture as well as trade balance and balance of payments, he warns. In FY25, India imported goods worth $45.6 billion from the US and had a trade balance of $40.8 billion. The target of 4.3% for fiscal deficit is an ideal number, and it should enable us to meet whatever expenditure requirements are there. It reflects the government’s commitment to fiscal prudence. -V. Vulanam,Expenditure Secretary Dhar says as a developing economy, India enjoys the benefit of special and differential treatment and lower tariffs and longer implementation period. “Cutting duty to zero for an 18% tariff on its imports will harm India’s interests,” he says. There are also questions on how long the trade deal with the US will hold given the volatile nature of the US President and his policies and if India can stop all oil purchases from Russia. The Executive Order by the US says it could reimpose the 25% penal tariff if India buys Russian oil. India, the third-largest importer of oil, has always had a diversified sourcing strategy. A later document by the US government has, however, changed the language and said India “intends” to buy more American products and purchase over $500 billion and has removed reference to certain pulses and text that India would remove its digital services tax. The concessions on the agriculture sector to the US also need to be studied carefully. Meanwhile, just days after sealing a deal with India, the US has also concluded an Agreement on Reciprocal Tariffs with Bangladesh with a 19% reciprocal tariff. Significantly, the US has also committed to establishing a mechanism that will allow for certain textile and apparel goods from Bangladesh to receive a zero reciprocal tariff rate; this has raised concerns among Indian exporters. The Confederation of Indian Textile Industry says this has opened a fresh challenge for India’s textiles and apparel exporters, for whom the US is their single-largest market. This challenge is two-fold. First, the tariff differential between India and Bangladesh has halved from 2% to 1%, which is a matter of concern in a sector with narrow profit margins. Secondly, the US–Bangladesh agreement could likely adversely affect India’s cotton yarn exports to Bangladesh. An assessment of the impact of the deals must be undertaken to understand areas where we can do better, says Srivastava of GTRI. “The government must also undertake a review of the performance of the recently signed FTAs to understand utilisation, which is the most important aspect of trade deals, to gauge their impact on the ground. This will also give industry an opportunity to understand where they can do better,” he says. Hermann says implementation of reforms must catch up with ambition. “This year’s Budget didn’t deliver a big-bang moment, but that was hardly unexpected after last year’s income tax, GST, and labour reforms. The real test, however, lies not in announcements but in execution, especially the new Labour Codes,” she says. What’s more, the mood across the world remains muted and on edge. Like in 2025, India cannot step back and must continue pursuing policy action, hoping for the best while preparing for the worst. @surabhi_prasad

How India has orchestrated a reset in its trade ties

Two trade pacts in two weeks and a growth-oriented Budget could redefine the country's economic prospects.