In June 2023, Indian Prime Minister Narendra Modi embarked on a significant state visit to the United States, showcasing the deepening diplomatic ties between the two nations. The warm welcome from then-President Joe Biden highlighted the importance of the US-India relationship, which many experts believe will define geopolitical dynamics in the 21st century. Biden emphasized this sentiment when he stated, "I've long believed that the relationship between the United States and India will be one of the defining relationships of the 21st century."
Fast forward to earlier this year, when Modi returned to the White House to meet with newly elected President Donald Trump. While the atmosphere was less ceremonious, discussions focused on deal-making and strengthening bilateral ties. However, by August 27, the landscape had shifted dramatically. Most Indian goods entering the US market now face a staggering 50% tariff—one of the highest in the world, raising concerns about the implications for India’s burgeoning economy.
The deterioration in relations between the US and India escalated swiftly after both nations failed to reach an agreement during crucial trade talks. These discussions were particularly tense following Trump's announcement of tariffs against several trading partners in April. Matters worsened when he imposed an additional 25% tariff on India, specifically targeting its purchases of Russian oil. This rapid decline in relations has raised alarms in Washington, with officials recognizing India's strategic importance in the Indo-Pacific region for both stability and security.
In India, the implications of these tariffs have sparked considerable anxiety regarding their potential impact on the nation’s fast-growing economy. India’s exports to the US, which amounted to approximately $87 billion (€74.5 billion) in 2024, are projected to plummet by more than 40% by 2026, according to the Global Trade Research Initiative, a think tank based in New Delhi. This decline could see exports fall to around $50 billion, jeopardizing crucial sectors such as textiles, jewellery, and gemstones.
Despite the potential fallout, Rick Rossow, who chairs the India and Emerging Asia Economics program at the Center for Strategic and International Studies (CSIS), notes that the economic impact on India's overall economy might be limited, as the targeted sectors represent only about 14% of the economy. However, the impact on Modi's ambitious Make in India initiative, which focuses on boosting manufacturing, could be significant at this critical juncture.
On the other hand, the US exported around $42 billion worth of goods to India in 2024, revealing a significant trade imbalance. While Singh points out that the economic losses predominantly affect India, he also highlights that the US will not be immune to consequences. One notable impact may be a decline in the number of Indian students enrolling in US universities, which has traditionally bolstered the US education sector.
As the situation evolves, both nations may still have room for negotiation. Sushant Singh notes that India is eager to finalize a trade deal, as it would provide a much-needed win for Trump. The likelihood of reaching an agreement remains, given the volatile nature of the Trump administration. Rossow concurs, suggesting a thaw in tensions is beneficial for both sides, especially with India's economic trajectory on the rise.
The current episode poses a serious challenge for Modi domestically, which could prompt him to seek a resolution. With shared concerns over China's rising influence, fostering a strong US-India partnership will be crucial for regional security and economic growth. As tensions continue to unfold, the urgency for both nations to collaborate effectively remains paramount.
