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The United States and India are on the verge of reaching an interim trade agreement, a development that holds significant implications for both nations' economies. The core of the negotiation revolves around tariffs, with the US reportedly considering lowering its proposed tariff rate to below 20%, a notable reduction from the initially suggested 26%. This potential concession by the US underscores the importance of the Indian market and the desire to establish a more cooperative trade relationship. High-level discussions are anticipated soon, with Indian officials expected to travel to the US to finalize the terms of the agreement. However, the path to a successful deal is not without its obstacles. President Trump's recent remarks expressing concerns about India's involvement with the BRICS group introduce a layer of complexity to the negotiations. These geopolitical considerations highlight the broader context in which trade agreements are forged, where economic interests intersect with strategic alliances and political agendas. Despite the uncertainties surrounding the final outcome, the prospect of a US-India trade deal has sparked considerable interest and debate, particularly within India's business and policy circles. Even if the trade agreement fails to materialize, India can still leverage the existing global trade dynamics to its advantage. SBI Research suggests India can diversify its exports and tap into new markets, thereby mitigating the adverse impacts of potential US tariffs. This resilience and adaptability are crucial for India to navigate the complexities of the global trade landscape.
SBI Research has identified specific sectors where India possesses a comparative advantage and can capitalize on the current tariff realignment. The chemical sector, including pharmaceuticals, emerges as a prime opportunity for India. The US is a major importer of chemicals, and with China facing significantly higher tariffs (55%), India has a window to increase its market share. Should India secure a tariff rate lower than Singapore's current 25%, it could potentially capture 2% of the US chemicals import market, translating into a 0.2% boost to India's GDP. Moreover, India can target market share from other countries like Japan, Malaysia, and South Korea, which face higher tariffs than India. Capturing just 1% of their share in US-bound chemical exports could further augment India's GDP by an additional 0.1%. The textile sector, particularly apparel and accessories, is another area where India holds a revealed comparative advantage. While facing competition from countries like Bangladesh, Cambodia, Indonesia, and Vietnam, India benefits from lower tariffs compared to most of these nations (except Vietnam). This pricing advantage could enable India to increase its market share in US apparel imports. Currently, India accounts for 6% of US apparel imports. By capturing an additional 5% market share from its competitors, India could add 0.1% to its GDP. These findings underscore the potential for India to transform the tariff threat into an economic opportunity by strategically focusing on sectors where it possesses a competitive edge.
Beyond the US market, India is also exploring opportunities to strengthen its trade relationships with ASEAN countries. The Free Trade Agreement (AIFTA) is currently under review, with the aim of addressing tariff distortions and addressing loopholes in the “rules of origin” provisions that have facilitated the dumping of Chinese goods through ASEAN. Despite the existence of the AIFTA, India's exports to ASEAN have declined in share over the years, while imports have remained relatively stable. A strengthened FTA could facilitate deeper market access for India in ASEAN, particularly in sectors like agriculture, chemicals, and processed products. Simultaneously, it could help prevent the circumvention of trade regulations by curbing the influx of Chinese goods routed through ASEAN countries. This strategic approach to trade diversification is essential for India to reduce its dependence on any single market and to build a more resilient and diversified export base. However, the India-US trade negotiations are not without their sticking points, most notably concerning access to the Indian agriculture and dairy sectors. The US is advocating for greater access to these sectors, but India is apprehensive about the potential consequences for its small farmers. SBI Research estimates that opening the dairy sector could lead to a 15% reduction in domestic milk prices, resulting in an income loss of approximately Rs 1.03 lakh crore for Indian farmers. The surge in milk imports by as much as 25 million tonnes could exacerbate the supply-demand gap and further depress domestic prices.
The dairy sector is a significant contributor to India's GVA (2.5-3%) and employs roughly 8 crore people. A 15% decline in milk prices could translate into a GVA loss of about Rs 0.51 lakh crore, posing a substantial threat to rural livelihoods. The potential shift in producer surplus to consumer surplus may appear beneficial to urban consumers, but it would disproportionately impact small and marginal farmers, potentially undermining the rural economy. This highlights the complex trade-offs that policymakers must consider when negotiating trade agreements, balancing the interests of various stakeholders and safeguarding the livelihoods of vulnerable populations. In light of the uncertainties surrounding the US-India trade deal and the potential challenges posed by US tariffs, India is also exploring alternative trade partnerships, notably with the European Union. The EU, seeking to counter US tariffs, is reportedly looking to deepen trade ties with India and the Asia-Pacific region. This presents an opportunity for India to diversify its export markets and reduce its reliance on the US. The EU's interest in strengthening trade relations with India underscores the growing importance of the Indian market and its potential as a strategic partner in a changing global trade landscape. India can capitalize on these opportunities by focusing on sectors where it has a revealed comparative advantage and by proactively addressing the concerns of its domestic industries and farmers.
The ongoing trade negotiations between the US and India present a complex interplay of economic opportunities and potential challenges. While the reduction in proposed US tariffs offers a positive sign, the sticking points surrounding agriculture and dairy underscore the need for careful consideration of the potential impacts on vulnerable sectors. India's ability to diversify its export markets, strengthen its trade relationships with ASEAN and the EU, and capitalize on its comparative advantages in sectors like chemicals and textiles will be crucial in navigating the evolving global trade landscape. SBI Research's analysis provides valuable insights into the potential economic impacts of various trade scenarios, highlighting the need for a strategic and proactive approach to trade policy. Furthermore, with President Trump announcing 30% tariffs on imports from the European Union and Mexico starting August 1st, opportunities for India to step in to take market share is rapidly increasing. The Indian government must balance the pursuit of trade liberalization with the protection of domestic industries and the livelihoods of its farmers. This requires a nuanced and comprehensive approach that takes into account the broader geopolitical context and the diverse interests of various stakeholders. Ultimately, the success of India's trade strategy will depend on its ability to adapt to changing global dynamics, to leverage its competitive advantages, and to forge strategic partnerships that promote sustainable and inclusive economic growth. The key will be finding the right balance of protecting domestic industries while simultaneously seeking avenues to expand its global economic footprint. It is of great importance that India capitalize on trade shifts globally to boost economic growth and opportunity for the people.
Source: US-India trade deal nears: Can India unlock a multi-billion-dollar export boom despite tariffs?