Prime Minister Narendra Modi and US President Donald Trump met earlier last week in the White House amid tensions surrounding the US announcement of imposition of reciprocal tariff on trade partner countries to address “longstanding imbalances”. Per Nomura, the outcome of the bilateral meeting was in line with expectations, with near-term trade frictions likely to continue, and a possibility of a strategic partnership over the medium term. Sonal Varma, Managing Director and Chief Economist (India and Asia ex-Japan), Nomura, said, “Short-term risks from reciprocal tariffs remain, but medium-term gains are possible once the dust settles on the trade war.”
The bilateral Modi-Trump meeting was centered around a trade deal, more energy imports from the US, defense cooperation and a reiteration of the strategic partnership. In an analysis report released after the meeting with the two leaders, Nomura stated, “Negotiations on the India-US trade deal will start, and some concessions are likely, but given India’s higher tariff rate, high non-tariff barriers and its trade surplus with the US, it remains in Trump’s line of fire on reciprocal tariffs, in our view.”
What transpired and what followed the Modi-Trump meeting?
Earlier, while speaking about the reciprocal tariffs, Trump had particularly singled out India, stating that it has “more tariffs than nearly any other country” and that “it’s very hard to sell into India because they have trade barriers, very strong tariffs”. Post the meeting, US and India made following announcements:
• Trade deal: India-US to start negotiations on a trade deal to address the trade gap. Both countries agree to double bilateral trade to $500 billion by 2030.
• On reciprocal tariffs: Trump maintained that India has the highest tariffs in the world. He said that “now we are a reciprocal nation. Whatever India charges us, we will charge them”.
• Energy: India will import more US oil and gas to shrink the trade deficit. The US aims to become India’s top energy supplier. India will reform its laws to welcome US nuclear technology, and the two will cooperate on civil nuclear energy and small modular reactors.
• Defense: US plans to offer the F-35 warplane to India. To launch an Autonomous Systems Industry Alliance, with a framework for defence cooperation, aiming for joint development, joint production and transfer of technology.
• Other areas of cooperation: Collaborate on the India, Middle East, Europe (IMEC) corridor, which is seen as a counter to China’s Belt and Road Initiative (BRI). To work together on AI, chips, and quantum technologies. Focus on the recovery and processing of lithium and rare earth minerals.
Is the ‘reciprocal tariff’ challenge averted? Which sectors are most at risk?
While the negotiations on the trade deal, which is expected to conclude by Q4 2025, will target India buying more US oil & gas, renewable energy and defense equipment, whether this will be enough to avert the challenge of higher reciprocal tariffs is not clear. In terms of sectors, electrical/industrial machinery, gems & jewellery, pharmaceuticals, fuels, iron & steel, textiles and clothing, vehicles, and chemicals, among others, form the majority of the exports. Also, while India’s trade surplus with the US moderated somewhat during the first Trump presidency, it has picked up sharply since and reached a high in 2024, rising to $38 billion from $31.2 billion in 2023.
The US accounts for approximately 18 per cent of India’s total exports and around 2.2 per cent of GDP (as of FY24), and it is India’s largest export destination.
Sonal Varma said, “India’s weighted average effective tariff on US exports to India is ~9.5 per cent, versus a 3 per cent tariff rate on India’s exports to the US. Tariffs in India across products are higher than those imposed by the US, with the highest differentials for food items, textiles and clothing, and transportation equipment. With President Trump adding that the reciprocal tariffs will also be used to address non-trade barriers imposed, India remains in Trump’s line of fire on reciprocal tariffs.”
Further, it is also worth noting that even before the Modi-Trump meeting, India had started taking steps to reduce tariffs and it is considering more steps. In some final goods sectors, like say, luxury cars and two-wheelers, Indian consumers would benefit from lower prices and more choices, while domestic manufacturers will need to be more competitive, Nomura maintained.
Other key factors will also be how global trade shapes up in the aftermath of reciprocal tariffs and how other countries will react to these tariffs and whether Indian exports will remain comparatively competitive once the dust settles.
In terms of oil, Russia has merged as a key source of India’s oil imports over the last few years. Now with the US looking to become India’s top energy supplier, it is likely that India could purchase less from Russia over time. “While this may result in a reduction of India’s bilateral trade surplus with the US, this will likely be offset by an increase in the trade balance with Russia. So on aggregate, India’s overall trade balance may be largely unchanged,” Nomura said.
Beyond India-US trade balance, the bilateral meeting also reinforced the importance of the US-India strategic partnership in areas like defense and technology.
