Amid a shrinking trade surplus with the US in light of outsized 50 per cent tariffs imposed by India’s largest trading partner, there has been a rejig of strategy. India has stepped up energy purchase from America, and started to explore trade diversification to mitigate the impact of the steep tariff rates. Here’s a look at what is at stake ahead of the talk starting Wednesday.
India’s trade surplus with US shrinks
A high goods trade deficit between India and the US was one of the most prominent concerns raised by US President Donald Trump even before he assumed office earlier this year. However, the latest trade data suggests that New Delhi has stepped up imports from the US, narrowing the trade gap. Data shared by the commerce and industry ministry shows that India’s goods trade surplus with the US has nearly halved to $1.45 billion in October from $3.17 billion in April.
While the US tariffs have resulted in a steep decline in exports to the US, particularly after August 27, when 50 per cent tariffs came into effect, India has stepped up imports from the US. India’s exports to the US slipped from $6.86 billion in August to $6.30 billion in October, and imports surged from $3.6 billion in August to $4.84 billion in October. The decline has been most pronounced in labour-intensive goods such as garments, footwear and sports goods.
US crude imports surge while Russia’s slip
The additional 25 per cent tariffs have been among the most politically strained issues between the two countries, holding up the trade deal. The imposition of additional tariffs on August 27 derailed trade deal negotiations and led to further complications. With US tariffs on India reaching 50 per cent, India became the hardest hit country from the tariffs as the US lowered its tariffs on China last month following a trade truce.
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However, the two countries may reach a consensus as India has steadily increased crude imports from the US, and Washington’s sanctions on Russian oil companies Lukoil and Rosneft have led to a decline in Russian oil exports to India. Trade data showed that the US’s share in India’s oil imports has surged to 7.48 per cent between April and October this year, compared with 4.43 per cent during the comparable period last year. In contrast, Russia’s share has come down from 37.88 per cent to 32.18 per cent.
India-US LPG deal & nuclear reforms
In what could also likely result in the rollback of at least the additional tariffs, Indian public sector refiners last month signed a one-year deal for American liquefied petroleum gas (LPG) imports. While crude oil imports are already nearing 10 per cent, the imports of LPG of around 2.2 million tonnes per annum (MTPA) of LPG also come close to 10 per cent of India’s annual imports.
LPG is predominantly used as a cooking fuel, with much of India’s requirement being imported from countries like Saudi Arabia, the United Arab Emirates, Qatar, and Kuwait. For the past few years, the US has been the fifth-largest supplier of crude oil to India. It has also been the second-largest supplier of liquefied natural gas (LNG) to India. As for LPG, over 60 per cent of the petroleum fuel’s requirement in India is met through imports.
Amid the Trump administration’s push for expansion of existing nuclear power plants and the development of small-scale reactors, India has also signalled greater openness for cooperation with the US under the trade deal. Prime Minister Narendra Modi last month said that the government is preparing to open up India’s tightly regulated nuclear power sector to private participation.
Urgency for India beyond exports
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Beyond the consecutive decline in goods export to the US in September and October, India is witnessing a heightened increase in uncertainty over investment as competing countries are facing lower tariffs. A Bank of America (BoFA) research note said that the primary challenge India is facing due to US tariffs has been on capital flows.
“Capital flows are an issue which remains multifaceted, and has been seen across FDI flows, FPI flows, and debt-related inflows, which have, to a certain extent, stalled. Indeed, the RBI, as per official data, has sold $65bn in the open market between October 24 to September 25, and is also running a large short forward book position of $63.6bn until the end of October, which has probably increased in November given the extent of pressure on the rupee,” the report said.
The report said that the recent bout of weakness in the rupee, which has weakened almost 7 per cent in the last year, and has meaningfully underperformed against other currencies, has resulted in a larger real effective exchange rate depreciation of over 9 per cent. This weakness, which may persist in the near term given the latent uncertainty of the US-India trade deal, and pressure on capital flows, can and will impact various macroeconomic variables in India, if it persists, the report said.
Governments’ swift push for diversification & reforms
The uncertainty around the trade deal that has triggered an outflow of investments has also prompted a re-examination of India’s industrial policy. In the past few months alone, the government has rolled back numerous quality control orders (QCOs) that had a bearing on the competitiveness of the MSME. The government also removed the 11 per cent duty on cotton to ease pressure on the textile value chain due to US tariffs.
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After the GST rate rationalisation earlier this year that eased the prices on numerous products of everyday consumption, the government also notified long-pending labour codes. A government panel on reforms led by former cabinet secretary and Niti Aayog member Rajiv Gauba is working on a fresh set of reforms to push for deregulation to boost manufacturing.
Meanwhile, India has increased its push for trade deals with large markets such as the European Union. A large trade delegation is already in India, aiming to sign a deal by the end of the year. New Delhi has also opened negotiations with New Zealand, Israel, Chile and Peru. Earlier this year, India also began negotiations for a trade deal with Russia, led Eurasian Economic Union.
