From Trade War to Trade Truce: Washington and Delhi Recalibrate

The US and India have agreed an interim trade framework that pulls both sides back from last year’s tariff escalation, offering relief to exporters while leaving deeper structural frictions unresolved. The agreement, announced in earlier this month, reduces US tariffs on Indian goods to roughly 18%, down from punitive levels that had climbed towards 50% in 2025 amid disputes over market access and energy ties. In return, New Delhi has committed to lowering or eliminating duties on a range of American industrial and agricultural products and signalled its intention to step up purchases of US energy, technology and capital goods over the coming years.

For Washington, the deal is being presented as proof that pressure works. President Donald Trump has cast it as a recalibration that pries open India’s protected market while reinforcing supply-chain diversification away from China. US officials argue that American exporters, from farm producers to machinery manufacturers, will gain greater access to one of the world’s fastest-growing large economies. New Delhi’s framing is more guarded. Indian ministers describe the pact as a stabilisation mechanism rather than a sweeping free trade agreement. They stress that politically sensitive farm segments, including key staples and dairy, remain shielded, and that the framework is “interim”, designed to de-escalate tariffs while negotiations continue towards a more comprehensive bilateral trade agreement.

A truce, not a treaty

The 2025 tariff standoff marked the sharpest downturn in bilateral trade ties in over a decade. The US had imposed reciprocal tariffs of 25%, later adding surcharges linked to India’s continued purchases of discounted Russian crude. Indian exporters, particularly in textiles, gems and jewellery, leather goods and light engineering, faced a sudden erosion of price competitiveness in their largest export market. Despite the headwinds, exports proved resilient, reflecting strong US demand and India’s deep integration into certain supply chains. But the cost pressures were mounting. The new framework reduces that immediate strain, in our view.

Under the agreement, Washington rolls back the additional punitive levies, restoring Indian goods to a more competitive footing. India, for its part, will cut tariffs across selected US industrial inputs, agricultural commodities and processed goods. Both sides have also committed to address non-tariff barriers and regulatory frictions, a perennial irritant in the relationship. Crucially, US has stated that India intends to purchase USD 500bn worth of  US liquefied natural gas, crude oil and high-value manufactured goods over a five-year horizon. While not legally binding in the manner of procurement contracts, the signal carries geopolitical weight. India’s language, however, has been deliberately cautious. New Delhi has not described this as a binding contractual obligation but rather as a commercial opportunity aligned with India’s growth needs, especially in energy security, infrastructure expansion and defence modernisation.

Winners and vulnerabilities

For India’s export sector, the tariff reduction offers immediate breathing space. Labour-intensive industries, particularly textiles, apparel, footwear and jewellery, stand to regain lost margins. Engineering goods and select chemical products may also benefit as cost differentials narrow. Pharmaceuticals and IT services, though less directly affected by tariffs, could gain from improved regulatory co-operation and the broader thaw in trade relations.

Yet the gains are uneven. Indian agriculture remains politically sensitive and structurally fragmented. Any perception of creeping liberalisation risks reigniting domestic unrest. Even though staple crops have not been fully opened to US competition, opposition parties have accused the government of exposing farmers to future pressure. Rahul Gandhi, leader of the Congress party and of opposition in the parliament, has characterised the agreement as a concession that favours American exporters and compromises policy autonomy. Trade unions and farmers’ groups have staged protests, arguing that incremental tariff reductions today could translate into structural vulnerability tomorrow. The government rejects that characterisation, insisting that strategic sectors remain protected and that improved US market access strengthens India’s growth trajectory.

Strategic alignment but with caveats

Beyond tariffs, the deal sits at the intersection of geopolitics and macroeconomics. The US has long sought to reduce India’s reliance on Russian energy supplies and deepen defence and technology co-operation. India, meanwhile, has pursued a strategy of multi-alignment, maintaining energy purchases from Russia while expanding ties with the US and Europe. The energy purchase intentions embedded in the framework will be read in Moscow and Beijing as well as in Washington. They reflect India’s balancing act: securing affordable energy and diversified supply lines without appearing to subordinate its strategic autonomy.

For financial markets, the agreement reduces near-term trade uncertainty. Rating agencies have welcomed the de-escalation but caution that unresolved questions remain, including the pace of further tariff cuts, the legal status of purchase commitments and the durability of US trade policy under a transactional White House.

The road ahead

The timeline underscores how rapidly the relationship shifted. Talks towards a bilateral trade agreement began in early 2025. By mid-year, tariffs had escalated sharply. By late 2025, backchannel negotiations were under way to arrest the damage. February’s interim pact marks the first formal reset. Whether it evolves into a comprehensive trade agreement will depend on politically fraught areas: agricultural market access, digital trade rules, intellectual property protection and dispute resolution mechanisms.

For India’s policymakers, the challenge is twofold. First, to translate improved US market access into sustained export growth at a time when global trade is fragmenting. Second, to manage domestic political backlash and reassure vulnerable sectors that liberalisation will be sequenced and calibrated. For Washington, the deal is a tactical win, a demonstration that leverage can extract concessions. But it also underscores the limits of pressure. India remains a strategic partner, not a treaty ally, and its economic diplomacy will continue to be guided by domestic political constraints as much as geopolitical alignment. The interim agreement is therefore best understood not as a grand bargain but as a truce. It lowers tariffs, tempers tensions and buys time. The harder negotiations lie ahead, in our view,