In February 2025, Prime Minister Narendra Modi visited Washington, D.C. and held high-level talks with U.S. President Donald Trump. During these discussions both sides launched a new initiative called the U.S.-India COMPACT (Catalyzing Opportunities for Military Partnership, Accelerated Commerce & Technology) for the 21st Century under which a “bold new goal for bilateral trade, Mission 500”[1] was agreed to, seeking to double the trade to $500 billion. Soon after, in April 2025, U.S. Vice-President J.D. Vance visited India and together with Modi announced an agreement on broad Terms of Reference to initiate negotiations. The U.S. demanded greater market access to India and New Delhi’s openness to tariff liberalisation in some sectors.
Before the Modi visit, India had already cut tariffs on motorcycles and whiskies, and now proceeded with important gestures: offering to lower duties on over half of U.S. imports ($23 billion worth), proposing “zero-for-zero” tariffs on auto parts, and increasing energy and defence imports from the U.S. These moves were intended to build goodwill and secure an initial framework deal, with the expectation of a second tranche later in the year – possibly aligned with Trump’s planned visit to Delhi for the Quad summit in late 2025 and to sign a Bilateral Trade Agreement.
Despite this early progress, negotiations have faltered. India stepped outside its comfort zone to offer zero tariffs on industrial goods that formed about 40% of U.S. exports to India. Putting aside domestic pressures, India was willing to gradually lower tariffs on U.S. cars and alcohol with quotas, and reportedly acceded to the U.S.’ main demand of higher energy and defence exports worth $25 billion. India pushed for relief from the 10% average U.S. tariff announced in April, plus a rollback of steel, aluminium and auto duties.
Most differences seem to have been resolved after the fifth round of India-U.S. negotiations took place in Washington (July 14-17), and negotiators believed the U.S. would accommodate India’s reluctance on duty-free farm imports and dairy products.
However, India’s stance began to harden in late July after China’s deal with Trump, with New Delhi mulling the imposition of retaliatory tariffs on the U.S. in response to higher duties on steel and aluminium. After the U.S. also signed trade deals with key partners including Japan, and the EU, India scaled back its expectations hoping to secure a similar 15% tariff rate with fewer concessions.
Trump apparently wanted a headline-grabbing announcement with broader market access, investments and large purchases. The U.S. has insisted on access to India’s protected agricultural and dairy sectors. India has firmly refused to concede, citing food security, religious sentiments (U.S. cattle is raised on non-vegetarian feed), and sensitivity around genetically-modified (GM)-food, (any mixing of GM crops in the food chain will render Indian exports to the EU non-viable) as well as dairy products – a non-negotiable “no-go” zone for India.
On July 30, President Trump announced a 25% tariff on a wide range of Indian imports, effective August 7, alongside unspecified penalties to be levied due to India’s purchase of Russian oil and military equipment. These ‘unspecified’ tariffs, translating into an additional 25% were imposed on August 10, notably only on India – and will be applicable from August 27. There is talk of Trump imposing up to 250% tariffs on pharmaceuticals imports to the U.S. – towards the unrealistic aim of boosting local manufacturing.
With 25% tariffs, India expected the impact to be limited – because around 40% of Indian exports to the U.S. (pharmaceuticals, electronics, etc.) were already exempt under Section 232 tariffs. This means that generic medicines from India, many electronics, and auto parts were exempt. The tariffs also do not apply to goods exempt from the Executive Order (EO) 14257 reciprocal tariffs, such as gold, fuels, etc. However, curtailed exports worth roughly $40-48 billion could still face steep duties, affecting key sectors like textiles, gems, shrimp, spices, tea, carpets and machinery.
The additional 25% tariffs, however, have rendered most Indian exports noncompetitive. India’s negotiators seemingly underestimated the power of the U.S.’s own farm lobby, the mid-western Senators and dairy cooperatives, while also failing to prepare a fallback option that could produce a quick win if Trump escalated.
The strategic autonomy displayed by India seems to be an irritant. A June 17 phone call between PM Modi and President Trump on the eve of the lunch to which Pakistani Field Marshal Asim Munir was invited by Trump is being seen as the precipitatory cause – PM Modi conveyed clearly that India does not and will not accept third party mediation. PM Modi turned down President Trump’s invitation to stop by the White House on the way back from the G7 meeting in Canada where Munir could also be present. He thus did not allow Trump to claim a role in successfully mediating between India and Pakistan. Unlike many other countries, India has also not endorsed President Trump for the Nobel Peace Prize. Lastly, there could also be an echoing of Silicon Valley’s irritation with India’s requirement of data storage within its borders.
Indian exporters have reacted sharply; many including Basmati rice exporters, have had to put U.S. export orders on hold and have urged government intervention. The diamond industry, rugs, textiles and footwear sectors are also expected to face huge volume declines in fiscal 2025. The IT industry and the student community from India in the U.S. are all bracing for any adverse impact of the spat in the future.
The standoff comes at a time when India was poised to implement strategic programmes in the defence, scientific and strategic fields with the U.S. The trade tensions could potentially affect India’s export competitiveness, scaling of manufacturing capacity, creation of new supply chains, attracting more foreign investment and denting India’s optimism for a $500 billion trade breakthrough.
At the moment, India has no plans to retaliate. Ministries are assessing whether to make some more concessions – particularly in the agriculture and dairy sectors in addition to areas in energy and defence equipment – to reach a deal which will eliminate the crippling tariffs.
The imposition of a penalty linked to Russia has heightened mistrust, as India seeks to maintain its strategic autonomy in foreign policy decisions. There is hope that the U.S.-Russia agreement on a possible ceasefire in Ukraine could negate the logic of tariffs related to purchase of energy and defence items from Russia. The U.S. EO itself states that the order could be modified should India or Russia take “significant steps” towards aligning with the U.S. on security, foreign policy, or economic matters. A U.S. Appeals Court is also weighing whether to declare Trump’s imposition of tariffs illegal. While the new EO on secondary tariffs is not directly at issue in the pending court ruling in those cases, it could impact the legality of these tariffs.
As Ajay Shrivastav of research firm Global Trade Research Initiative (GTRI) notes, India is the U.S. tech companies’ largest market, and a vital source of data and talent. Companies like Google, Meta, Amazon and Microsoft rely on India to test products, train AI models, and drive global growth. There are at least $80 billion worth of takeaways which are not being talked about – $ 25 billion from Indian students, and the contribution which India makes to the profits of American technology, finance, and consulting firms. Defence deals, subscription services, and U.S. back-end centres ensure that money flows are favourable to the U.S.
What are New Delhi’s options? Within India, while the negotiators have offered a lot, protecting farmers, small businesses, and domestic industries remains paramount. India must be seen as upholding its principles but show flexibility in the 21-day window before the 50% tariffs kick in. India has reaffirmed it’s commitment to a “fair and balanced” deal, wary of a domestic backlash if trade liberalisation threatens local livelihoods. India could accept a limited “phase-one” agreement with tariff liberalisation in non-sensitive sectors (e.g., auto parts, energy), coupled with more energy imports and defence purchases from the U.S. This would secure initial economic benefits and goodwill, with phase two tackling agriculture or dairy – much like the India-Australia Economic Cooperation and Trade Agreement of 2022.
Negotiators could also ink smaller sectoral pacts—for example, zero duty on auto parts, mutual recognition for pharma ingredients, carve-outs for digital trade – allowing modular progress. Any compromise on agriculture access could include safeguards, quotas, or safeguard duties to limit volume, along with transitional support and investment for India’s farmers to upgrade productivity. Genetically Modified corn for instance, could be imported into special zones for ethanol blending, and its by-products, like distillers dried grains mixed with solubles. Almonds, pistachios and walnuts, which have no local competition, could be imported under thresholds and quotas. Livestock product import licenses could be simplified.
The next round of talks is facing uncertainty, pending a political resolution. The U.S. had indicated last month that its negotiators will be in India on August 25, but President Trump implied on July 8 that negotiations are off for now until the issues at hand are resolved. India would still like to engage pragmatically, in a phased agreement, securing early wins while preserving red lines on sensitive sectors like agriculture and dairy. Experts like Ajay Srivastava of GTRI argue that India cannot agree to changing its patent laws, data rules, or procurement policies, and must insist on legal certainty and no new tariffs post the agreement.
Only a carefully balanced, incremental negotiating framework – one that blends economic pragmatism with protection of core domestic interests, backed by political will – stands a realistic chance of bridging the current impasse. Simultaneously, India must prepare for the scenario in which tariffs are enforced – by diversifying export markets, deepening trade with other economies, bringing about structural reforms and eventually, examining reciprocal tariffs.
Amb. Anil Wadhwa is the Distinguished Fellow, Gateway House and Former Secretary (East), Ministry of External Affairs, Government of India.
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References:
[1] U.S. Embassy & Consulates in India, ‘United States–India Joint Leaders’ Statement,” February 13, 2025. https://in.usembassy.gov/united-states-india-joint-leaders-statement/