How will India’s tariff cuts on US imports impact economic growth?

Prime Minister Narendra Modi’s meeting with US President Donald Trump last fortnight marks a crucial moment in India-US relations.

Building on the discussions from Trump’s first term, this time, the leaders focused on key trade dynamics, including reciprocal tariffs, expanding oil and gas imports, and increasing India’s procurement of US military products in the coming years.

India faces growing macroeconomic challenges amid international trade tensions. These include the threat of tariff escalations from the US, the ongoing rupee depreciation, inflationary pressures, and uncertainties around foreign investment.

Recent tariff adjustments, particularly those in response to immediate pressures from the US, signal India’s willingness to engage in further trade negotiations.

The question is whether these short-term diplomatic efforts to address immediate US trade demands and prevent potential disputes are affecting its broader strategy for long-term economic growth and global trade integration.

Impact of tariff cuts

Traditional trade theory and policy literature suggest that the gains of a North-South Free Trade Agreement are lower for countries of the Global South due to limited trade creation or diversion effects.

The recent Modi-Trump meeting signals a similar outcome – the threat of reciprocal tariffs remains, even as India is being pushed to lower tariffs for US goods to mitigate any trade disputes. Reciprocal tariffs imply that the US will impose tariffs on every country that taxes US imports.

For India, this protectionist stance prompted…

Read more