Trump’s imposition of a 50% tariff on India has so far not had a major impact. The Sensex remains above 80,000, India’s S&P rating has improved, and the national mood is upbeat with discussions about expected price slash of air conditioners and large-screen televisions due to GST reduction. However, more than 50% of Indian exports to the United States will be affected, particularly in labour-intensive sectors such as textiles and clothing, gems, and jewellery. The US GDP is almost one-fourth of the world’s GDP, and tariff barriers in the US market are a significant concern for Indian manufacturers and exporters. There is an exemption for electronic items and the pharmaceutical sector, but the duration for the exemption is unknown, and the uncertainty continues.
Bilateral Trade Partners and FTAs
While the post-Trump era has ushered in a tariff war, India must look for new trade partners and increase the exchange of goods and services through strategic alliances. Free Trade Agreements (FTAs) and Regional Trade Agreements (RTAs) remain vital instruments, though often at odds with the “Most Favoured Nation” principle of the World Trade Organisation (WTO).
Between 2009 and 2011, India signed three major FTAs with ASEAN, Japan, and South Korea. Expectations were high, but as a previously protected economy, India struggled to reap immediate benefits. With tariff reductions, imports surged far faster than exports, leading to widening trade deficits and calls to renegotiate these agreements. After this initial spree, FTA activity slowed until 2022, when India signed a Comprehensive Economic Partnership Agreement (CEPA) with the United Arab Emirates (UAE), followed by a trade pact with the European Free Trade Association (EFTA). While the UAE is India’s second-largest export destination (USD 36.64 billion), within EFTA, only Switzerland imports more than USD 1 billion worth of goods from India. Given EFTA’s wealthy consumer base, India’s gains here may lie in niche markets rather than mass products. India also concluded an economic partnership with Australia in 2022 and a landmark deal with the United Kingdom in 2025. Both the Government of the U.K. and India are equally buoyant about this FTA. Indian Prime Minister mentioned that this agreement would “catalyse trade, investment, growth, job creation, and innovation in both our economies”. India is also having an ongoing trade negotiation with New Zealand and, most importantly, with the European Union.
India and RCEP
India’s urge for economic partnership agreements gained momentum after its withdrawal from the Regional Comprehensive Economic Partnership (RCEP) in 2020, following years of negotiations since 2013. Concerns over domestic dairy interests, a rising trade deficit with China, and geopolitical factors shaped the decision. While some economists, including BVR Subrahmanyam, CEO of NITI Aayog, have argued that India should reconsider joining RCEP, Commerce Minister Piyush Goyal categorically rejected the idea in November 2024. Still, the “boycott China” sentiment has softened amid changing geopolitical compulsions. In the first quarter of this fiscal year, India’s exports to China grew by nearly 20%. But India’s total exports to China were only 14.25 billionUSD compared to its exports of 86.5 billion USD to the USA in 2024-25. As relations with China improve, India may find renewed value in engaging with RCEP, the world’s largest trade bloc. Participation could also encourage China to ease non-tariff barriers on Indian goods, while ASEAN, Japan, and South Korea may see India’s presence as a way to balance power within the group.
Outward FDI
Another strategic option for Indian businesses is outward foreign direct investment (FDI) in countries like Vietnam and Cambodia, which specialise in labour-intensive industries such as garments and enjoy more favourable access to US markets. However, if the tariff pressures in the post-Trump era prove short-lived, companies may prefer a “wait and watch” approach rather than committing resources abroad. Indian companies have invested across the globe. A few major investment proposals worth mentioning are Aditya Birla Group’s USD 50 million investment in the USA for the production of epoxy resin, Hero Motor Corp’s proposed assembly line in Nepal, and Navin Jindal’s Vucan Green Steel’s investment in Nigeria. Adani Group, Reliance and Tata Sons have various foreign direct investments across sectors in both developing and developed countries. Textile major Raymond has an existing investment in Dubai and garmenting facilities in Ethiopia. The Aditya Birla group has existing major investments in the textile sector in Indonesia, Thailand and the Philippines. 400 Indian companies, both small and large, have investments in Vietnam. The investors include big Indian MNCs like Tata International. Indian companies already have their footprint globally for manufacturing set up; there will be further investments outward if the tariff stalemate continues.
Conclusion
There is a major setback in India’s trade negotiations with the USA. The chance of concluding a trade deal with the USA remains distant. Ultimately, India must adopt an aggressive strategy of signing FTAs and strengthening its participation in RTAs. India’s negotiation with the European Union is vital for sustaining the tariff pressure from the USA. This will be crucial in offsetting potential losses in the US market and ensuring long-term resilience in the global trade order. While the Government of India can enter into economic partnerships, the onus of making it successful lies with the Indian industry. Indian industry may also choose the FDI route to offset the tariff barrier by the USA. Considering the thaw in Indo-China relations, India may also like to re-evaluate its stance on joining the RCEP.
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