Minister of Commerce and Industry, India, Piyush Goyal and US Trade Representative, Ambassador Katherine Tai, at the 14th Ministerial-level meeting of the India-United States Trade Policy Forum (TPF) in New Delhi, January, 2024. | Tathya.
India’s economic relations with the world’s largest economy rest on larger geopolitical considerations and a nuanced and calibrated approach best serves its developmental objectives.
India’s economic relationship with the United States, the world’s largest economy and most influential global economic power, has witnessed multiple peaks and troughs over the decades, yet the US has mostly remained its largest export market, especially for services. The US has also been among the top investors in the country as also a preferred destination for overseas investments by India. For the US, India represents an important trade partner, ranking 12th in its total trade between January and May 2025, with a share of 2.7%[1].
Economic Survey 1999-2000; Economic Survey 2001-02; Economic Survey 2011-12; Economic Survey 2021-22; r-calculations based on EIDB
In its most recent tariff salvo, the US has imposed a blanket 25% rate on its imports from India beginning 1st August 2025, followed up with an additional 25% ‘punitive’ tariff for India’s continued purchase of fuel from Russia, applicable from 27th August 2025. However, further talks on a trade agreement have not been ruled out, leaving a window open for more negotiations as part of a coercive strategy to bend India to its trade wishes.
Tracing the relations
Before India’s liberalisation era commenced in 1991 and coinciding with the Cold War period, India’s economic relations with the US remained strained. However, the US occasionally responded to India’s tribulations, most notably by stepping up to export wheat in the 1960s, during a drought period when India became dependent on this on a ship-to-ship basis. The US support in rolling out India’s Green Revolution proved invaluable, resulting in India’s self-sufficiency in food. Similarly, the US helped India set up its institutes of technology. However, India’s first nuclear tests in 1974 considerably dampened relations. While bilateral leadership visits continued, progress in economic relations remained slow.
Following India’s second nuclear test in 1998, the US imposed sanctions, withdrew developmental aid and persuaded the World Bank not to offer promised funds. These, along with actions by other countries, resulted in significant economic difficulties for India.
However, India overcame the risks by issuing Resurgent India bonds that brought in US$ 4 billion and restored confidence in economic management. The US sanctions stayed in place only for a short time and intensive diplomacy over the next few years led to their progressive withdrawal till they were ended in 2001. Despite the adverse overall relations during this period, the share of the US in India’s exports climbed up from about 15% in 1990-91 to 21% in 2000-01.
This was also the period of the Y2K anxieties where Indian tech firms gained a strong foothold in the US services markets, an advantage it retains to date. The focus thereafter shifted to the nuclear deal and defence cooperation with the signing of the civil nuclear agreement in 2005 standing as a historical milestone in the relationship. A trade agreement opening up the US market to Indian mangoes and lowering barriers to import of high-value motorcycles in India added to trade.
The Trade Policy Forum was established in 2005 to discuss trade and investment issues, covering five focus groups with a Private Sector Advisory Group added as an adjunct in 2007. Eleven meetings were held till 2017 and the 12th meeting came after a gap of four years, with the 14th meeting held in January 2024. A range of issues have been taken up at these discussions, including agriculture, resilient supply chains, critical minerals, intellectual property rights, customs and trade facilitation and others.
The India-US Commercial Dialogue has also been in place since 2000, with the 6th meeting being held in 2024. The dialogue focuses on ease of doing business, standards and tourism. The India-US CEOs Forum was established in 2005 and reconstituted several times since then.
While trade was on a steady upward trajectory, except for a brief blip during the global financial crisis of 2008-09, the share of the US in India’s exports declined to just about 10% in 2010-11. In 2009, the two sides commenced the India-US Strategic Dialogue (elevated to the Strategic and Commercial Dialogue) and in 2010, India-US Economic and Financial Partnership and the India-US Strategic Dialogue were instituted, both aimed at deepening and broadening cooperation including in the economic sphere. Nine rounds of the Economic and Financial Partnership have been held so far, with the latest round in November 2022, followed by sub-group meetings.
The first visit of Prime Minister Narendra Modi to the US in September 2014 imparted new energy to the overall relationship. The joint statement covered various aspects of economic growth including increasing trade five-fold to US$ 500 billion. The India-US Investment Initiative and Infrastructure Collaboration Platform were proposed along with cooperation on intellectual property, innovation in advanced manufacturing and harmonisation of standards. This was followed by President Obama’s second visit to India, this time as Chief Guest for the 2015 Republic Day, which built on many of the initiatives announced in 2014.
The first Trump Administration saw several adverse trade policies from the US with the President terming India as ‘tariff king’ and withdrawing India’s benefits under the generalised system of preferences (GSP) in 2019. India also imposed tariffs on 28 US items in retaliation for the US tariffs on steel and aluminium that year.
Since 2014, Prime Minister Modi has visited the US on ten occasions and there have been three incoming visits by Presidents Barack Obama in 2015, Donald Trump in 2020 and Joe Biden in 2023, with notable new directions added to economic cooperation. Various dialogue platforms continued to be held across diverse areas until the second Trump Administration assumed charge in January 2025.
The unprecedented and unilateral flurry of tariff threats and announcements coming from the US since then flies against all established rules of the global trading regime. India took an early advantage with Prime Minister Modi’s visit to the US in February 2025 when the two sides agreed to negotiate a multi-sectoral bilateral trade agreement for fair and mutually-beneficial trade to reach a target of US$ 500 billion. In his reciprocal tariff announcements of 2nd April 2025, President Trump placed tariffs on goods from India at 26% and this was amended to 25% on 30th July with an unspecified (1st August) further imposition of 25% announced on 6th August 2025.
Economic relations trajectory
Total trade in goods and services for 2024 stood at US$ 212 billion, as per US data, still quite distant from the target of US$ 500 billion laid down in PM Modi’s 2014 visit and reiterated during his 2025 visit.
Between 2017 and 2020, when the first Trump Administration was in place, India’s goods trade with the US remained largely flat, according to data from India’s Department of Commerce. However, in the Covid year of 2020-21, the drop in exports to the US stayed at -2.8%, while imports fell by over -19%. The next year saw a significant surge in total trade with exports jumping up by 47.5% and imports by 50%. As of 2024-25, exports stood at US$ 86.5 billion and imports at US$ 45.7 billion, totalling US$ 132.2 billion with a trade deficit of about US$ 41 billion, its highest ever.
Graph from EIDB
On the services side too, trade has expanded since 2021, as per data from the US Bureau of Economic Analysis. While Indian exports to the US have steadily grown, India’s imports from the US have more than doubled between 2016 and 2024, with trade now evenly balanced between the two countries.
Graph from BEA
Annual flows of FDI in both directions have been largely steady. The US has remained the third largest destination for Indian funds. ODI from India to the US has been range-bound at around US$ 2-3 billion annually, crossing US$ 3.3 billion in 2024-25. Similarly, the US has invested about US$ 71 billion in India between April 2000 and March 2025, contributing 10% to India’s total cumulative FDI. On an annual basis, FDI from the US surged in 2020-21 and 2021-22, and dropped back to a level of about US$ 5-6 billion in subsequent years. Some part of the two-way investment flows would also have reached the recipient country via Mauritius or Singapore, the top two countries for India for both inward and outward investments.
Graph from DPIIT and DEA
Beyond trade and investment, the two sides have instituted collaborations in areas such as energy and climate change, science and technology, space, health, and critical and emerging technologies. Dedicated platforms have been instituted for these areas.
Apart from the economic cooperation being discussed at bilateral forums, India and the US have also led and participated in important economy-related plurilateral mechanisms like the Quad, Indo-Pacific Economic Framework (IPEF), India Middle East Economic Corridor (IMEC), and I2U2 of India, Israel, UAE and US. The future of all these platforms remains uncertain in the wake of the tariff wars unleashed by the US and its withdrawal from some international institutions and its own international developmental aid program.
A possible approach
Despite a range of dialogue platforms between the two sides, the statements and press releases over the years indicate little actual progress in substantive issues such as opening of markets, intellectual property, building resilient supply chains, harmonisation of standards and conformity, among others. The statement during PM Modi’s US visit in February 2025 talked about alfalfa hay and duck meat, both of which are of little interest to Indians, while concessions for Indian mangoes and pomegranates by the US were welcomed. Other specific products like US bourbon, motorcycles and medical devices were also mentioned as having been opened up in India. Such selective opening up on either side is unlikely to boost trade significantly and products such as mangoes and motorcycles find a place in statements over many years.
As seen in the disputes taken to the WTO, India and the US have regularly been imposing various trade measures on each other in recent years, followed by discussions to dial these down.
With trade uncertainty likely to persist during President Trump’s second term, leading to a rethink on exports as a driver of growth in all partner countries, India too must revisit its external economic engagement framework. This would cater to two fronts, the first being on boosting its exports and the second on driving its domestic competitiveness. While the actions for domestic competitiveness are well-known and must be intensified and accelerated, a strategy for external economic engagement would include several areas.
First, India’s reliance on the US as an export destination needs to be lowered considerably. India has entered into free trade agreements with significant partners such as the UK, EFTA, Australia, UAE and others, and these would stand it in good stead as it looks for alternate markets.
India has been relatively weak in taking advantage of opportunities in less developed countries that have large markets and dynamic growth. This is often due to non-tariff barriers which Indian exporters find challenging, such as standards or trade facilitation requirements. Much more will need to be done to strengthen exporter capabilities to address underserved markets.
Second, India must take measures to maintain its market share in the US. This may involve absorbing some of the higher tariffs by its exporters to keep the cost to US consumers in line with competitor countries, depending on the elasticity of the product in the US. While India aims to increase labour-intensive exports such as textiles and garments to the US, such products face a challenge from other countries which are more competitive than India even after being hit with higher tariffs. Goods that have high potential in terms of revealed comparative advantage can be identified and promoted for exports to the US, with benefits provided to manufacturers and exporters such as easier credit, higher remission incentives and other measures.
Third, India should take care to avoid the tariffs that the US is adding to trans-shipment goods. This means greater value addition in India and moving from assembly to manufacturing parts and inputs within its shores. India has the advantage of a large and diversified industrial base that has the potential to cater to products across the supply chain and can make efforts to attract investments in these areas.
Fourth, India must also be vigilant regarding dumping by other countries seeking to diversify their exports from the US.
Fifth and finally, it is important that India continues on the path of openness and avoids the temptation to indulge in protectionism for its own manufacturing sector. Its import duties have remained too high for too long, at odds with its overall economic liberalisation.
Even while the US has cast aside the tariff rules that the world has operated within for decades, this should be viewed as a temporary phenomenon and not detract from India’s external reforms process.
India’s economic relations with the world’s largest economy rest on larger geopolitical considerations, and a nuanced and calibrated approach best serves its developmental objectives.
(Exclusive to NatStrat)
Endnotes:
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