US & India: Can They Untangle a Geopolitical Trade Knot?

MUMBAI, India – High-stakes negotiations have just kicked off in Mumbai, as US and Indian trade negotiators embark on two crucial days of talks. The goal? To finally hammer out a trade deal that has remained elusive for years, now made even more complicated by a recent geopolitical bombshell: Washington’s imposition of hefty tariffs on New Delhi over its continued purchases of discounted Russian oil.

This isn’t just about trade; it’s a tightrope walk between economic necessity, strategic alliances, and global politics. With the global stage constantly shifting, can these two economic giants find common ground?

The Elephant in the Room: Tariffs and Geopolitics

The latest hurdle emerged in August when the US slapped a staggering 50 percent levy on most Indian goods. The reasoning from US officials was clear: India’s robust import of discounted Russian crude, they argued, effectively bankrolls Moscow’s war in Ukraine, thereby undermining Western sanctions. This move fundamentally shifted the dynamics of US-India relations, intertwining trade policy with geopolitical strategy in an unprecedented way.

Adding another layer of complexity, Deputy US Trade Representative Rick Switzer’s visit comes barely a week after Prime Minister Narendra Modi warmly embraced Russian President Vladimir Putin in New Delhi. While India’s foreign ministry downplayed Switzer’s meetings as a mere “familiarization” trip, the timing and context speak volumes.

India was an early player in seeking trade talks after President Donald Trump’s sweeping tariffs in April. Yet, it remains one of the few major economies without an agreement, a situation that now poses significant risks to jobs, economic growth, and market stability.

India’s Economic Crossroads: What’s Really at Stake?

As the world’s fastest-growing major economy, India’s ability to navigate this trade challenge is paramount. The country recorded a substantial $45.8 billion goods trade deficit with the United States in 2024. While key export categories like smartphones and generic drugs enjoy exemption from Trump’s tariffs, many crucial labor-intensive industries are not so lucky. This is a severe blow for a nation already grappling with the immense task of generating well-paid jobs for millions of young graduates, threatening Modi’s ambitious vision of elevating India to high-income status.

The impact is already being felt:

• Export Plunge: Overall exports plummeted by nearly 12 percent year-on-year in October, largely driven by a sharp drop in US-bound shipments.
• Sector-Specific Devastation: The Global Trade Research Initiative (GTRI) estimates that labor-heavy sectors – including gems and jewellery, textiles, and seafood – witnessed export drops of 37-60 percent between May and September.
• Market Instability: Foreign investors have pulled over $16 billion from Indian equities this year, contributing to the rupee hitting a record low past 90 per dollar.
• Growth Downgrade: The International Monetary Fund (IMF) has trimmed India’s 2026-27 growth forecast from 6.4 percent to 6.2 percent, explicitly citing the assumption of “prolonged 50 percent US tariffs.”
• Economic Contraction: Exports could shrink to about $49.6 billion this fiscal year, down from $86.5 billion last year, potentially shaving up to 80 basis points off growth, according to GTRI.

The Russian Oil Conundrum

India’s robust purchasing of discounted Russian crude following the 2022 invasion of Ukraine was a pragmatic economic decision, as Moscow faced severe international sanctions. However, Trump’s August decision to link this to trade policy fundamentally altered US-India relations. Roughly half of the current tariff burden directly stems from Washington’s attempt to penalize these purchases.

The narrative around India’s ongoing Russian oil imports remains complex. President Trump has repeatedly claimed India either intends to stop, or has largely ceased, buying Russian oil – a claim New Delhi has neither confirmed nor denied. Yet, during his recent visit to India, Putin offered to “continue uninterrupted shipments of fuel,” while Modi remained silent on the oil flows directly.

However, there are signs of change: top buyer Reliance Industries announced in November it had stopped importing Russian oil for its export-focused refinery, and smaller refiners like HPCL-Mittal Energy have claimed to have ceased entirely. Analysts at Kpler anticipate a “notable dip” in India’s December-January imports. Whether this decline will be sufficient to sway Washington remains a critical question.

Beyond Oil: Other Sticking Points

The trade talks also hit snags over agriculture, with India steadfastly resisting pressure to reduce tariffs on staples like rice and wheat. This resistance stems from a deep-seated caution about alienating its politically powerful farmer constituency. Although a senior Indian commerce ministry official indicated these issues are “largely resolved,” Trump recently reignited tensions by criticizing India for “dumping” rice into the United States.

Negotiating a comprehensive trade pact is further complicated by the need to address Trump’s so-called reciprocal tariffs. Officials acknowledge that while these are technically “two separate, parallel negotiations,” they are intricately linked, with progress in one often feeding into the other.

Glimmers of Hope? Towards a Breakthrough

Despite the formidable challenges, relations have shown signs of improvement since August, with several smaller deals progressing. Notably, the US approved two arms sales worth nearly $93 million to India in November. More significantly, New Delhi finalized a substantial deal for the United States to supply nearly 10 percent of its liquefied petroleum gas (LPG) imports.

Energy commitments have historically anchored successful US trade deals. Experts suggest that this substantial LPG contract might be a crucial step in convincing Washington that India is indeed diversifying its energy sources and reducing its reliance on Russia. While an elusive comprehensive deal remains a significant undertaking, these recent developments offer a glimmer of hope that a breakthrough, however incremental, might finally be within reach.

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