How rosy is the India-US trade deal? Thorny dilemmas explained

When Prime Minister Narendra Modi and US president Donald Trump posted near-simultaneous messages on social media on February 2, indicating that their respective teams were “closer than ever” to finalising a comprehensive trade understanding, the digital mood turned instantly buoyant.

In his post, Modi was restrained, careful not to “over-commit”, but Trump, on his favourite platform Truth Social, tried to spill the beans. In private conversations, senior ministers of the Modi government confirmed that a deal had indeed been reached but chose not to share details. Before making this public, Trump had shared INDIA TODAY’s cover as an attempt to project warming up to Modi.

India Inc, economists and think-tank circles treated the development as a long-awaited breakthrough in an otherwise cautious trade calendar. US Chamber of Commerce president Suzanne P. Clark described it as “a reset moment for the world’s two largest democracies”. The social media pages of Indian corporate houses lit up with optimism.

Markets followed the mood. On February 3, the Sensex jumped about 2.5 per cent, or 2,073 points, and the Nifty 50 rose 2.6 per cent in intra-day trade. The rupee strengthened 1.2 per cent against the dollar. Analysts attributed the rally to expectations that the trade deal could restore duty concessions lost after the Trump administration’s ‘weaponisation of tariffs’.

Officials privy to the negotiations say the initial part of the deal aims to reduce average US tariffs on Indian goods to about 18 per cent. These duties were imposed after Washington accused New Delhi of buying discounted Russian crude oil. Trump claimed India had agreed to scale down Russian crude purchases, although officials have not confirmed that.

Data from energy analytics firm Kpler shows India’s Russian crude imports at roughly 1.2 million barrels per day in January, a decline from the 2025 peaks of around 1.8 million barrels, but still a major share of India’s oil import basket. Moody’s Investors Service has warned that an abrupt halt could disrupt India’s energy security. And according to a top official in New Delhi, “The reduction in Russian oil is economic not geo-economic.”

Trade economists see the removal of Russia-linked tariffs as a significant win. “If those duties go, India gains a huge price advantage,” says a top official. “Even least-developed countries like Bangladesh, which enjoyed a clear edge under WTO preferences and had started edging us out in textiles and garments, will now fall behind once India concludes its EU deal as well. The combined effect could re-establish India’s dominance in these labour-intensive exports.”

Still, the prospect of a trade deal with the US comes with caveats. Even if this agreement lowers most tariffs, large parts of Indian industry will still run into a wall called Section 232.

That little-known clause of the US Trade Expansion Act allows Washington to impose or retain tariffs on “national security” grounds, independent of any bilateral negotiation or WTO discipline. It was first used by the Trump administration in 2018 to slap 25 per cent duties on imported steel and 10 per cent on aluminium, later extended to automobiles and select machinery. Those measures remain intact.

India’s exports of metal-intensive goods to the US were about $8.3 billion (around Rs 76,000 crore) in 2024. Some trade experts believe that a large slice of the country’s manufacturing backbone would continue to face elevated entry barriers despite the new rapprochement.

The irony is unmistakable. The leaders may sign a “landmark” pact celebrating openness while the protectionism embedded in Section 232 survives untouched. Unless the final text contains a waiver or exclusion mechanism, these tariffs will remain immune to diplomacy. Commerce ministry officials admit this is among the toughest sticking points. The US treats Section 232 as a sovereign prerogative, not a negotiable duty.

Beyond metals, the complexity of the emerging deal lies in its depth. This is not a tariff-for-tariff adjustment. It stretches into areas central to India’s developmental policy: agriculture, intellectual property, digital governance and government procurement. That is where domestic caution, and some outright anxiety, are concentrated.

“What the hell just happened to India’s strategic autonomy?” asked the Congress’s Manish Tewari, a former Union minister, questioning the deal, adding: “The recent remarks by US president Donald Trump and their agriculture secretary pertaining to the trade deal with India are worrisome, especially for our farmers. The government of India must share the tenets of the trade deal with Parliament so that the nation is aware of the situation.”

Farmers’ organisations, still distrustful after the 2020 farm laws episode, have already asked that agriculture be kept out of the deal. Leaks from the negotiating track suggest Washington is pressing for quantitative import quotas for US corn, cotton, soybeans and ethanol, with minimum price commitments. Indian growers fear a backdoor opening for cheap American commodities that could depress domestic prices.

A senior Sanyukt Kisan Morcha official called it “liberalisation through stealth”. It would also test the Modi government’s longstanding assurance to Rashtriya Swayamsevak Sangh (RSS) affiliates—the Swadeshi Jagran Manch, Bharatiya Mazdoor Sangh and Sahakar Bharati—that agriculture and dairy will remain protected.

Commerce minister Piyush Goyal, keen on a global trade spree, has so far defended those red lines. Since the night of February 2, Goyal as well as officials in New Delhi have been talking to various key stakeholders and explaining the broad contours of the deal.

Goyal even held a media conference on February 3, where he described the trade agreement as “historic and forward-looking”. He said it had been finalised after a year of detailed negotiations. He assured that sensitive sectors, such as agriculture and dairy, had been “fully safeguarded” while labour-intensive industries, such as textiles, leather, gems and jewellery, and MSMEs would gain the most from the tariff cuts. Goyal said the reduction in US duties on Indian goods to around 18 per cent would “sharpen India’s export competitiveness” and reiterated that “no concessions have been made at the cost of national interest”.

However, dilemmas persist. Compounding farm anxiety is the push for genetically modified (GM) crops. The US agri lobby wants India to relax bio-safety approvals to allow GM corn and soy imports. India has authorised only GM cotton, after a decade-long battle. Any concession on GM foodgrains, particularly ahead of the Tamil Nadu and Kerala assembly elections, where farmer unions are vocal, could ignite protests.

Richard M. Rossow of the Center for Strategic and International Studies in Washington D.C. notes: “New Delhi has held firm so far, though negotiators were under heavy pressure.” In Washington’s Beltway, the buzz is that US ambassador to India Sergio Gor conveyed these political sensitivities to the White House to clinch the deal and repair ties.

The pharmaceutical front is equally sensitive. American negotiators and industry groups have long lobbied to dilute India’s patent safeguards, especially Section 3(d) of the Patents Act, which prevents “evergreening” of old molecules. They also want India to accept data exclusivity provisions that would bar the Drugs Controller from approving generics based on originator-company data for a set number of years. Civil society groups see that as a red line. “It would gut India’s generics model and raise global drug prices,” warns Leena Menghaney, formerly with Mdecins Sans Frontires.

India insists it will not weaken the legal framework that underpins its generics exports, but the language of trade chapters can be deceptive. The US often embeds stricter IP standards through backdoor definitions rather than overt amendments. India took a similar defensive posture in its trade deal negotiations with the European Union, where Brussels pushed hard for data exclusivity and patent-term extensions. New Delhi flatly refused, arguing such clauses would cripple access to affordable medicines.

In talks on the UK-India free trade agreement (FTA) too, London tried to import the EU-style IP template, but India resisted, stressing that its law already complies with TRIPS (Trade-Related Aspects of Intellectual Property Rights) and cannot be rewritten for private lobbies. Those episodes showed India’s willingness to walk away from a deal rather than erode the foundations of its generics industry.

Whether it maintains that firmness with Washington, whose pharmaceutical and biotech lobbies wield far greater political weight, will determine how “clean” the India-US trade partnership will be.

Equally contentious is the digital-trade chapter. Washington wants India to join a permanent moratorium on customs duties for electronic transmissions, first mooted at the WTO, and to commit to free cross-border data flows. That would prevent India from taxing digital imports—music, films, software or cloud services—and could erode fiscal space. For a government that has championed a Digital India Levy to capture revenues from global tech platforms, this is a strategic dilemma.

Officials argue that taxation rights are sovereign, yet signing away that space under an FTA could make it politically irreversible. India faced the same pressure in its EU and UK negotiations, both of which demanded binding commitments on data localisation and duty moratoria. In those cases, New Delhi held its ground, arguing the digital economy was too nascent and revenue-sensitive to be locked into permanent non-taxability.

The fifth area of contestation is government procurement. US negotiators want access to India’s vast public-purchase market, particularly in energy and infrastructure. Make in India and MSME reservation clauses currently ring-fence much of that space. Opening it, even partially, would please global investors but unsettle domestic manufacturers reliant on state orders.

A senior bureaucrat involved in the talks said India might agree only to a “negative list”, meaning sectors excluded from commitments but not a blanket opening. The EU had pushed for similar access, and India resisted by offering only transparency provisions, not open bidding. The UK too sought entry for its infrastructure firms, but India cited its federal procurement laws to hold the line. The US demand now tests whether that precedent can hold under greater strategic pressure.

Equally subtle are policy-alignment clauses. In earlier US deals with Malaysia and Cambodia, Washington inserted language nudging those countries to align domestic regulations on environment, labour or investment with US benchmarks. If similar formulations creep into the India text, they could dilute policy flexibility without parliamentary debate. Indian negotiators, seasoned by the EU and UK experiences where “soft-law” language later morphed into binding conditions, are wary this time.

A related flashpoint is the digital-tax question. The US wants a global standstill on digital-service levies. India’s Equalisation Levy, which nets roughly Rs 3,300-Rs 3,500 crore annually from multinational platforms, would be frozen or rolled back. Both the EU and UK talks confronted similar impasses. India maintained that any moratorium without an alternate global tax framework was unacceptable, a stance likely to resurface in Washington.

Finally, regulators worry about agri-standards equivalence. Will India be compelled to accept US food exports that meet American standards even if they breach local residue limits or GMO (genetically modified organisms) thresholds? Past pacts have used “mutual-recognition” clauses that bypass domestic testing. Food-safety authorities argue India’s right to set its own norms must remain intact.

The EU sought similar equivalence, especially for dairy and meat, and India’s refusal to dilute its Food Safety and Standards Act was one reason those negotiations stalled. That precedent suggests New Delhi will again treat sanitary and phytosanitary standards as non-negotiable.

Each of these issues may sound technical, but collectively they raise the central question of sovereignty in a liberalising economy: how much policy space is India willing to cede for market access and strategic partnership? The government insists it will “carefully safeguard all sensitive sectors”, yet the balance of bargaining power is evident. The US market is nearly twice India’s size, and Washington controls the high-technology transfers New Delhi craves for semiconductors and defence manufacturing.

The strategic calculus is equally weighty. The US has become India’s largest trading partner, with $128.9 billion in goods trade in 2024 and roughly $212 billion when services are included, according to USTR (United States Trade Representative) and BEA (Bureau of Economic Analysis) data. The two nations already cooperate closely through the Quad and Indo-Pacific security frameworks. A strong economic pillar would cement that architecture. For Modi, a trade pact with Washington underscores India’s arrival as an industrial partner. For Trump, it offers a rare bipartisan foreign policy win while keeping China contained.

Yet politics intrudes. At India, 2026 is a year of key state elections. Any hint of compromising farmers’ or MSMEs’ interests could feed Opposition narratives. Abroad, Trump’s economic team is split between free-traders and “America First” protectionists who favour selective tariffs, the logic behind Section 232. That duality explains why metals and autos may remain outside tariff relief.

Global investors, meanwhile, are watching how India handles these “rule-making” frontiers, data, procurement and intellectual property. These will shape competitiveness more than tariff cuts. The challenge for New Delhi is to convert partnership optics into genuine technology and supply-chain gains, not just symbolic tariff victories.

In 2019, India had walked away from the Regional Comprehensive Economic Partnership (RCEP) fearing cheaper Chinese imports. This time, New Delhi is stepping in, but with Washington, the stakes are higher, the benefits greater and the risks subtler.

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