The keenly-awaited India-US trade deal has unexpectedly hit a wall. Until recently, it was anticipated that the two countries would either reach an interim deal or that Donald Trump would extend the deadline, just as he did with a 90-day snooze on reciprocal levies. But none expected Trump to charge at India with a 25 percent tariff, which will kick in from August 7, plus unspecified penalties and a warning of further punitive levies later. Though the tariff shocker was disappointing, the Indian government maintained calm, indicating that intimidation would not resolve tensions; tactful diplomacy will. Trump, on the other hand, seemed restless and issued a series of provocative statements about striking an oil exploration deal with Pakistan, whose product can then be sold to India, and terming Russia and India as ‘dead’ economies. Separately, he warned Indian companies of sanctions over Iranian petroleum purchases.
What’s unsettling Trump is India’s rising energy and defence purchases from Russia, which he claims is feeding the latter’s war machine. So by wielding the trade weapon, he hopes to undercut countries doing business with Russia and force Vladimir Putin to agree to a truce with war-torn Ukraine. While India values its diplomatic ties with Russia, it will be interesting to see if the escalating trade tensions and sanctions will force it to alter its economic strategy under pressure. In other words, the proposed India-US deal is not about trade alone, but is a potent tool to declare supremacy. Unarguably, this is Prime Minister Narendra Modi’s biggest challenge yet to retain economic and diplomatic stance with both Russia and the US without compromising on credibility and preserving strategic trust. But unlike China, which too teetered between confrontation and conciliation while negotiating with Trump, India only has a few bargaining chips in its negotiation arsenal.
While India remains committed to a fair trade agreement, the government has vowed to protect the welfare of farmers, entrepreneurs and small enterprises. Besides the moral aspects, India must carefully calibrate the economic risks and get as many trade deals with other countries as possible to gain leverage and reduce risks. At the same time, the government should explore options to get the US deal going without ceding ground and losing out on the existing trade ties. Such a task needs not political grandstanding, but a sensible strategy that prizes stability over spectacle.