India Must Strive For Reform Not Better Trade Bargains

By Govindraj Ethiraj

The US Supreme Court’s recent ruling striking down President Donald Trump’s tariffs as illegal—rejecting the administration’s expansive reading of the 1977 International Emergency Economic Powers Act—has granted New Delhi an unexpected, albeit temporary, reprieve.

Although Trump quickly bypassed the ruling by invoking Section 122 of the Trade Act of 1974 to reinstate a 10% global tariff, which he subsequently hiked to 15%, the playing field has fundamentally shifted.

Whether the US tariff settles at 10% or 15%, India now finds itself on equal footing with the rest of the exporting world. In many ways, the global trade environment has reverted to the status quo ante of early 2025.

What happens next is, as always, unclear and thus makes speculation about Trump's next move a futile exercise.

Yet, this judicial intervention provides a crucial window of opportunity. Ajay Srivastava, founder of the Global Trade Research Initiative (GTRI), told me over the weekend.

According to him, India is under no obligation to honor the tentative framework of the previously negotiated—and largely one-sided—US trade deal.

Crucially, nothing has been signed till date.

Protectionism Holds Back

Tellingly, an Indian trade delegation bound for Washington to formalise an interim agreement literally turned back on its way to the airport on Sunday.

According to Reuters, the decision to defer the visit was mutual, driven by the tariff uncertainty following Friday’s judgment.

Navigating this diplomatic and economic maze will require considerable tact.

India must avoid needlessly antagonizing the US president while seizing the chance to reset a deal that would have forced zero-percent import duties on American goods—a concession fraught with severe political and economic domestic blowback down the line.

However, the spotlight on Washington’s volatility obscures a more uncomfortable truth at home: India’s own protectionist reflexes are the primary anchor weighing down its export potential.

India’s Trade Missteps

As Singapore-based economist Priyanka Kishore highlighted in Nikkei Asia last week, India’s historical tryst with free-trade agreements (FTAs) has been deeply troubled.

By 2011, New Delhi had inked 15 FTAs, predominantly within Asia, which deepened regional trade integration. However, these pacts also triggered a surge in imports and widened trade deficits, particularly with Southeast Asia.

The resulting public backlash soured the domestic appetite for trade liberalisation.

Consequently, India opted out of the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018 and abruptly abandoned the Regional Comprehensive Economic Partnership (RCEP) talks in 2019.

Why did these early FTAs fail to lift exports commensurately with imports?

Kishore argues that the agreements were inherently shallow, driven more by foreign policy optics than hard-nosed trade economics.

They focused narrowly on goods and tariffs while excluding substantial portions of bilateral trade from elimination—often hiding behind long phase-out periods to shield sensitive domestic sectors.

Partner nations like Japan, South Korea, and the ASEAN bloc capitalised on the access, but Indian exporters were largely left behind.

Not surprisingly perhaps, India’s share in global manufacturing exports has stubbornly stagnated at around 2%.

While empirical research demonstrates that liberalising input trade generally boosts domestic production and export competitiveness, this dividend has evidently eluded India.

The Culprit

One culprit is punitive duties on intermediate imports from non-FTA partners and a fundamentally weak domestic manufacturing base.

Despite commendable infrastructure upgrades over the past decade and the 2020 rollout of the production-linked incentive (PLI) scheme, India’s competitiveness gap with its Asian rivals remains glaring.

Consider the textile sector. Here, high operational expenses and poor labor productivity easily erase the advantage of cheap labor.

Coupled with elevated logistics costs, these inefficiencies have steadily eroded India's global export share, even though the country's annual wages are 74% lower than China’s and 58% lower than Vietnam’s.

Kishore concludes that India's manufacturing push has been fragmented, lacking urgency, and overly protective of domestic firms from foreign competition.

This defensive posture must change if India is to reap the benefits of its growing FTA portfolio.

The impending free-trade agreements with the European Union and the United Kingdom offer a lifeline to lower barriers and sharpen industrial competitiveness.

Self Imposed Burden

To return to the India-US deal, a blunt reality emerges: regardless of the tariff rate India secures for its exports, it must drastically slash its own import duties across the board.

Indian industry has long been shielded by an inverted tariff structure that actively harms its own producers.

As Swaminathan A Aiyar noted in The Times of India on Sunday, cotton is no longer the undisputed king of textiles.

Global industries in China, Vietnam, and Bangladesh have pivoted aggressively to man-made fibers like polyester and viscose, which now command nearly 70% of global fiber consumption.

Yet, India is structurally cotton-heavy because its tariff structure in inputs and outputs of textiles has long been inverted. Duties on polyester’s raw materials such as PTA and MEG have typically been much higher than on polyester itself, Aiyar says.

Consequently, Indian spinners and weavers face artificially inflated input costs compared to their global peers.

In an industry defined by razor-thin margins, a mere 3% to 5% cost disadvantage is fatal.

Even if FTAs eliminate tariffs on finished Indian garments entering Western markets, exorbitant raw material costs will continue to render exporters uncompetitive.

As both Kishore and Aiyar point out separately, Indian garment exports have flatlined, specifically around the $16 billion to $18 billion mark for years. Over the same period, Bangladesh's exports have gone past $40 billion.

Trump’s tariff tantrums may be unreasonable, but they have inadvertently laid bare India’s structural frailties.

Fixing these self-inflicted wounds is not a matter of striking a better diplomatic bargain in Washington.

It requires India to roll up its sleeves, dismantle its protectionist tariff structures, and finally get down to the hard business of reform.

Rs 63,478.46 crore

That’s how much the combined m-cap of six of the top-10 valued firms climbed last week.

Top three gainers:
- Larsen & Toubro → added Rs 0.29 lakh crore → took its valuation to Rs 6.02 lakh crore
- State Bank of India → added Rs 0.16 lakh crore → took its valuation to Rs 11.23 lakh crore
- HDFC Bank → added Rs 0.10 lakh crore → took its valuation to Rs 14.03 lakh crore
 

Top three decliners:
- Bharti Airtel → lost Rs 0.15 lakh crore → dragged its valuation down to Rs 11.28 lakh crore
- ICICI Bank → lost Rs 0.15 lakh crore → dragged its valuation down to Rs 9.97 lakh crore
- Infosys → lost Rs 0.07 lakh crore → dragged its valuation down to Rs 5.48 lakh crore

Larsen & Toubro and State Bank of India accounted for nearly 70% of the total increase. However, losses in telecom, IT and private banking stocks capped broader upside. Reliance Industries retained its position as India’s most valued firm, followed by HDFC Bank and Tata Consultancy Services.

The Pioneer presents India Finance & Innovation Forum 2026 convenes policymakers, regulators, financial institutions and industry leaders to examine India’s evolving financial architecture. Over three days, senior decision-makers will explore fiscal and monetary priorities, capital markets, digital finance and innovation-led growth through focused dialogue, networking and collaborative sessions on what’s changing, what works and what comes next.

India Defers US Visit

India has deferred sending a trade delegation to Washington after the US Supreme Court struck down tariffs imposed by Donald Trump, creating uncertainty over trade terms, Reuters reported citing sources. Trump subsequently imposed a temporary 15% tariff on imports, further clouding negotiations.

Context: The delegation was due to finalise an interim pact under which US tariffs on some Indian exports would fall to 18% from 25%, while India would commit to buying $500 billion worth of American goods over five years.

Setting: Trade Minister Piyush Goyal said the government is reviewing the ruling’s implications. India’s opposition, led by Indian National Congress, has urged renegotiation of the proposed deal.

Data Centre Boom

A Deloitte Asia Pacific report says India can leverage its structural advantages to emerge as a key data-centre hub in Asia Pacific, provided it addresses power bottlenecks, strengthens grid infrastructure and accelerates renewable integration.

Catch Up Quick: The study estimates that Asia Pacific could attract about $800 billion in data-centre investment by 2030. It says India can capture a significant share of that capital thanks to competitive land costs, relatively lower power tariffs and a deep AI talent pool.

Next Steps: The recent India AI Impact Summit saw major firms commit large AI and data infrastructure investments. Reliance pledged $110 billion, while Adani committed $100 billion toward AI-ready facilities. Global technology players also announced plans to expand cloud and AI ecosystems in India. The report calls for coordinated action across governments, operators and investors to ensure clean, reliable power keeps pace with rapid expansion.

Supply Shuffle

India has begun reshaping its crude oil import mix as Saudi Arabia regains market share and Russian supplies ease under sanctions pressure.

Origin: Analysts say India is not abandoning Russian oil but gradually rebalancing its crude slate to manage geopolitical risk, maintain supply security and avoid over-dependence on any one source.

Implications: The move signals a pragmatic strategy as refiners respond to tighter enforcement and shifting trade routes. Stronger Saudi flows reflect active engagement between producers and Indian buyers to lock in volumes through term contracts. At the same time, refiners continue to weigh discounts, freight costs and refinery configurations before adjusting sourcing decisions.

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