This report is from this week’s CNBC Inside India newsletter, bringing you up-to-date, insightful news and market commentary on the emerging powerhouse. Subscribe here.
The big story
India-US relations are expected to reach new heights in early 2025.
Prime Minister Narendra Modi was among the first foreign leaders to meet newly elected US President Donald Trump in February, just hours after he signed a plan to impose “reciprocal tariffs”.
The prospects were impressive as the leaders of the world’s largest and oldest democracies shook hands and pledged to double bilateral trade to $500 billion by 2030. Modi said: “Our teams will work to conclude a mutually beneficial trade agreement very soon.”
The December cut puts India among the countries with the highest tariffs in the world – levies that dwarf even those imposed on China, which was in Trump’s crosshairs during his election campaign.
WASHINGTON, DC – FEBRUARY 13: U.S. President Donald Trump and Indian Prime Minister Narendra Modi meet in the Oval Office at the White House on February 13, 2025 in Washington, DC.
Andrew Harnik | Getty Images News | Getty Images
India and the US have “strong economic incentives” to reach a deal, said Sonal Varma, Nomura’s chief economist for India and Asia (excluding Japan). The US needs reliable supply chain partners outside of China and India offers scale and capability, while New Delhi needs market access to Washington to sustain its export-led growth ambitions, she said.
Nevertheless, the negotiations appear to have hit a wall. A U.S. trade delegation concluded another round of talks in New Delhi last week without achieving a breakthrough, although U.S. Ambassador to India Sergio Gor called a conversation between Modi and Trump “great.”
“I think the biggest obstacle is political will,” said Mark Linscott, former deputy U.S. trade representative and senior adviser at the U.S.-India Strategic Partnership Forum, adding that “tariffs and agriculture are always difficult.”
He suggests that one way to get Trump on board would be a “grand gesture,” such as an “offer to purchase U.S. fuel ethanol or sustainable aviation fuel.”
As the United States seeks to improve its trade balance with the world’s fastest-growing major economy by increasing sales of energy and agricultural products, India has only partially agreed on energy procurement and has refused access to the politically sensitive agricultural sector.
“There is resistance in India to certain crops and other meats and sausages,” U.S. Trade Representative Jamieson Greer told the Senate earlier this month, adding, “That is the case.” [a] very difficult nut to crack.”
Delicate topics
India is under pressure from the US to curb its imports of Russian oil as Washington claims this will allow Moscow to withstand pressure from Western economic sanctions and continue its war against Ukraine.
In August, the US imposed additional tariffs of 25% on Indian imports, raising overall tariffs to up to 50% to deter New Delhi from buying Russian oil.
While the US has acknowledged that New Delhi has cut oil imports from Russia, President Vladimir Putin said during his visit to India earlier this month that Moscow was ready to provide “uninterrupted fuel supplies to India.”
India has not officially stated that it would reduce oil supplies from Russia.
“Our energy procurement depends on the dynamics of the global market, as well as the need for us to provide energy at affordable prices to our 1.4 billion people,” the State Department said earlier this month, refusing to intervene in oil procurement by private refineries.
Reuters reported on Wednesday that Indian refiners resumed buying oil from Russian companies that were not affected by U.S. sanctions in November and are “offering deep discounts.”
While experts believe that a peace deal between Russia and Ukraine that would end the conflict would remove the 25 percent “punitive tariffs” against India, granting the US access to the agricultural market would be a key sticking point and would prevent a trade deal.
Nomura’s Varma said agriculture is the “biggest stumbling block” as the US wants India to buy genetically modified crops and allow dairy exports – both of which face stiff opposition from the country’s domestic agricultural lobby, which wields significant political influence.
This becomes even more important as there are other major state elections in India next year, such as in West Bengal, Tamil Nadu and Kerala, where there are strong agricultural lobbies, followed by Uttar Pradesh in 2027 – the country’s largest agricultural state.
Bear the costs
As New Delhi and Washington negotiate a mutually beneficial agreement, the delay is proving costly.
“There is indeed a real economic impact from a prolonged absence of the deal,” said Pradeep Gupta, chairman and managing director of Anand Rathi Share & Stock Brokers, adding that capital flows were an immediate concern due to “significant volatility,” also reflected in a weakening rupee.
The lack of a trade deal is keeping markets “somewhat cautious”, especially when it comes to sectors “dependent on the US”, Gupta said, adding that once there is clarity on the trade front, there will be a “significant reduction in uncertainty premiums”. In other words, Indian stocks could see a significant rise.
His company estimates that a 50% tariff could reduce India’s GDP growth by about 0.5 percentage points, which would have a significant impact on export volumes. Goldman Sachs expects the Indian economy to be hit by 0.6 percentage points due to US tariffs.
India’s exports saw a sharp decline in October, although they were largely on an upward trend despite the tariffs taking effect.
“India weathered the shocks of the 50 percent tariffs quite well” and managed to circumvent them, but in the end the U.S. remains a top export destination for Indian products,” Michael Kugelman, Atlantic Council senior fellow for the South Asia region, said on CNBC’s “Inside India.”
“India will have to make some politically risky decisions,” he said, adding that it was still unclear whether an agreement would be reached soon.
The lack of a trade deal with the U.S. “has been a serious disadvantage for India,” Citi chief India economist Samiran Chakraborty said last week while discussing India’s 2026 outlook.
Meanwhile, experts in the U.S. say the tariffs are exacerbating affordability problems for families across the U.S. by contributing to inflation.
“These punitive tariffs [on India] “We are hurting U.S. consumers who spend more on a wide range of goods,” said Wayne Winegarden, senior fellow in economics at the Pacific Research Institute.
“The arbitrary, unnecessary and senseless trade war that President Trump has caused is complicating U.S.-India relations,” Winegarden said, warning that this deterioration in relations is bad for both countries.
To foot the bill for President Trump’s new tariffs, some small U.S. businesses are taking out high-interest loans and other forms of debt. Several business owners warn that they fear financial disaster.
India analysts also say American importers of pharmaceuticals, machinery and even consumer goods are struggling with higher input costs and supply chain friction.
But despite all the economic arguments in favor of a trade agreement, that India is an “important strategic partner” and Prime Minister Modi is “a great friend,” experts do not see much progress towards an agreement by the end of the year.
“[At] “At the beginning of the year, we thought India would be the first country to sign a trade deal and now, at the end of the year, it is the last country not to sign a trade deal,” Citi’s Chakraborty said.
Will the new year bring new ideas from both sides? Watch this area.
Top TV Picks on CNBC
Rajiv Batra, head of Asia equity strategy and co-head of global EM equity at JPMorgan, said his firm is overweight Indian equities and expects an earnings recovery and potential double-digit growth in the coming quarters.
Ajay Sahai, director general and CEO of the Federation of Indian Export Organizations, said that despite the lack of a US-India trade deal, about 50% of India’s exports are still exempt from tariffs and that exporters are still largely bearing the cost while they wait for tariffs to be eased.
Michael Kugelman, Atlantic Council senior fellow for the South Asia region, said Prime Minister Narendra Modi’s visit to Jordan, Ethiopia and Oman is an opportunity to strengthen trade ties as India faces trade uncertainty with the US
Must know
India’s goods exports rise in November. Exports rose 19% year-on-year to $38.13 billion in November, with the country’s trade with the US improving significantly. The country’s goods trade deficit, which hit a record of about $41.7 billion in October, shrank to $24.5 billion in November, beating analysts’ estimates.
Inflation rises in November. Consumer inflation rose to 0.71% in November, accelerating from an all-time low of 0.25% the previous month, driven by price increases for vegetables, eggs, meat and fish, spices and fuel. Inflation rose in both urban and rural areas.
Local production of petroleum Magnets. The Ministry of Heavy Industries has reportedly launched a Rs 72.80 billion ($805 million) incentive program to promote domestic manufacturing of rare earth permanent magnets as India looks to reduce its dependence on imports.
Quote of the week
Currently, the latest estimates show that India has lost about $250 billion due to air pollution in 2024 alone… We may no longer walk the sidewalk and shop as much, people avoid Delhi because from a tourist perspective [it is] so incredible.
— Gaurav Gupta, global managing partner, Dalberg Advisors
In the markets
On Thursday India Fancy 50 rose 0.12%, while the BSE Sensex was up 0.1% at 11:15 a.m. local time. The Nifty 50 posted two consecutive weekly declines while the Sensex ended lower last week. Year-to-date, the Nifty has gained over 9% while the Sensex has gained over 8%.
The benchmark 10-year Indian government bond yield fell slightly to 6.595%.
Stock chart iconStock chart icon
— Nur Hikmah Md Ali
Comes
Dec. 19: Minutes of the December monetary policy meeting; Weekly Forex reserves data
December 22: Gujarat Kidney and Super Specialty IPO opens
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