To get most out of trade talks with US, India needs to diversify exports, reform agriculture

Indian Express

04-08-2025

US President Donald Trump has delivered a strong blow to India by imposing a 25 per cent tariff, plus some unspecified penalty, on exports of most Indian goods. Several experts suggest that this may hit overall GDP growth by 20 to 30 basis points. In other words, the overall GDP growth in the financial year 2025-26 (FY26) may not reach 6.5 per cent as expected by the RBI, but may end up somewhere around 6.2 to 6.3 per cent. This is a significant loss, but not something that India cannot endure.
More damaging are the social media posts of President Trump, where he says, 'I don't care what India does with Russia. They can take their dead economies down together, for all I care'. Is India a dead economy? Really? India's economy is growing at more than 6 per cent, against the US's economy growing at less than 2 per cent, India is still the fastest-growing large economy in the G20 group. Yes, the size of the Indian economy (about $4.19 trillion) is way below that of the US, which touches $30 trillion. But in Purchasing Power Parity (PPP) terms, we are at more than $16 trillion and already the third largest economy.
A few things are clear from what has happened on the tariff front. First, the Trump-Modi bonhomie seems to be over. Investing in personal relations does not mean much to President Trump. He is transactional and focused on extracting as much from other countries as possible in the pursuit of his dream of Making America Great Again (MAGA). Second, he is very upset with Russian President Vladimir Putin for not heeding Trump's sermons on ending the Ukraine-Russia war – in his campaign, the US President had announced that he would end the war in 24 hours after taking office. Now he wants to punish those who are trading with Russia, especially for energy and defence needs. India is a soft target. Third, looking at what he has done to other countries to make trade deals, including allies like the EU, Canada, and Japan, it is clear that most of the US's allies are disillusioned. Fourth, by announcing tariffs for each country separately for the same products, he has literally buried the multilateral rules of the World Trade Organisation (WTO), especially the Most Favoured Nations clause. And finally, he does not like BRICS (Brazil, Russia, India, China, and South Africa), as he sees it as a threat to the dominance of the US dollar in global trade. So, all BRICS countries are on his target list.
How does one navigate the challenge of Trump's high tariffs? There are many options for India. Should Delhi retaliate by imposing high tariffs on US goods? But Indian tariff levels are already quite high, especially in agriculture (about 64.3 per cent trade weighted average). President Trump keeps referring to India as the 'tariff king'. So, such retaliation will not pay much. Prime Minister Modi has to look for better ways and convert this adversity into an opportunity. For that, we need to diversify our exports to other countries.
India's total exports of goods in calendar year 2024 were $442 billion, of which $80.7 billion, roughly 18 per cent went to the US. The high tariffs will surely impact such goods. The magnitude of the hit they will take actually depends upon tariff rates imposed on competing countries for each commodity.
If PM Modi goes on a drive to diversify exports to other countries, the impact of US tariffs can be minimised. Another thing to keep in mind is that our services exports to the world were $336 billion in the calendar year 2024, of which only 14 per cent ($47.5 billion) went to US. So far, Trump has not targeted services. But among goods, our top exports have been gems and jewellery (about $8 billion), pharmaceuticals (almost $7.7 billion), smartphones ($7.1 billion), and so on. Even frozen shrimps and prawns (marine products) account for $2.2 billion, and come in the top 10 goods exports to the US. Workers in Gujarat cutting diamonds and shrimp farmers in Andhra Pradesh and Odisha are likely to face the heat of this elevated tariff structure very soon. The government may think about how best to tide over this challenge.
What is it that India can offer to the US in the ongoing negotiations on the bilateral trade agreement? Both countries had envisioned taking the bilateral trade to $500 billion by 2030, up from the current levels of about $200 billion. That was a very optimistic vision, and India hoped that the tariffs imposed would hover between 10 to 15 per cent, similar to that levied on countries and blocs like the UK, EU, Japan, and South Korea. But that expectation has been belied, and now it seems that there is little chance to negotiate and bring these tariffs down from 25 per cent to somewhere in between 15 to 20 per cent.
This scenario seems probable only if India offers something substantial. It could be crude oil/gas purchases from the US, or defence items, or high-tech chips. Also, India can offer to lower duties on a wide variety of imports, from whiskey to luxury cars to even some agri-products such as walnuts and cranberries and put in place import quotas on other sensitive agri-products. The US's interest in agriculture is more in soya and corn, both GM crops. Prime Minister Atal Bihari Vajpayee had allowed GM cotton, traces of which are already in our food system. PM Modi has to take a stand, based on science, whether to allow GM food crops like rapeseed-mustard or BT brinjal, which are homegrown or to let in GM soya and corn through imports under tariff rate quotas.
Reforming our own agriculture should remain a priority. Agri-R&D is the way forward, especially in the face of the high tariff duties. But the calibration to reduce duties on agri-products has to be done gradually and carefully. This is an overdue agenda, irrespective of Trump's tariff pressures today. Hope India can do it.
The writer is Distinguished Professor at ICRIER. Views are personal