S Vice President J D Vance has just completed his 4-day visit to India. There was much bonhomie with that added touch since his wife, Usha, traces her ancestral origins to Andhra Pradesh. There was sightseeing too, at Jaipur and the Taj Mahal; and Prime Minister Modi entertained the family presenting peacock feathers to each of the 3 Vance children.
But beyond the public spotlight, the visit kicked off hard negotiations for a trade deal that India hopes will avert the US’ onerous 26 percent across-the-board tariffs. These are on a 90-day pause now; but they will kick in from 8 July if there is no deal by then.
President Donald Trump has been highlighting that India must drop tariffs specifically on US agricultural products, automobiles and whiskey. While both Trump and Prime Minister Modi describe each other as ‘friends’, the former has often come down heavily on India’s trade barriers with epithets such as ‘tariff abuser’ and ‘tariff king’.
The current body language however indicates India is perhaps closer than others to a bilateral trade agreement. After Vance’s visit, Trump told reporters in his Oval Office that India is on course to lower tariffs on American goods. On its part, India has been cautious not to displease Trump. In fact, it has bent backwards not to impose or even threaten retaliatory measures even after he declared 26 percent imposts on Indian goods.
In a display of accommodation, India began its roll back early. Post the Union budget, the government in February lowered duties for bourbon whiskey to 100 percent from 150 percent, while for imported motor bikes above 1600cc, duties were slashed from 50 to 30 percent. Currently, the government is mulling reduction of customs duty on heavy duty bikes to zero as a special concession for Harley-Davidson. The company’s exit from India over high import duty during Trump’s first presidency, has been a pet peeve of the President.
Hard negotiations
But it is unlikely these overtures are going to impress US negotiators. They have indicated, the US is not for piecemeal concessions, but an across-the-board deal that opens up Indian markets and bridges the current yawning trade deficit in India’s favour.
The US is India’s largest trading partner, and trade between the two in calendar 2024 amounted to a whopping $129 billion. However, while US exported $42 billion worth of goods to India, Indian exports to the US amounted to $87 billion, a deficit of $45 billion. India’s average tariff rate is 17 percent, compared with 3.3 percent by the US. For farm products it is notably higher. On walnuts it is 100 percent.
On the face of it, this looks discriminatory against the US; but its not really an apples-to-apples comparison. The US is a developed economy, with access to technology and diversified markets. India, on the other hand, is still a developing economy. Millions of micro and small enterprises (MSMEs), who offer the bulk of the jobs, are still struggling to find markets and consumers. Can they compete with their counterparts in the US?
Sample how this is panning out for the e-commerce market. In a recent report, the Financial Times (FT) said the US administration is going to be pressing hard for online retailers like Amazon and Walmart to the allowed full access to India’s $125 billion e-commerce market. Currently, Amazon and Walmart cannot hold inventory, or produce or market goods directly to consumers. They operate as a ‘neutral’ online ‘marketplace’ or platforms on which Indian vendors can sell their goods and services.
The rationale of these e-commerce rules is to shield small traders, and millions of kirana and mom-and-pop neighbourhood stores, and prevent their obliteration by giants such as Amazon. If its open season for Amazon and Walmart, as the Trump administration is demanding, trade associations fear the big retailers with discounted prices will shut out the small operators.
Farm economy
However, it is in the area of reducing tariffs on farm products that the Union government will find it most difficult to give in to US demands. Over the last 4-5 decades India has emerged as a robust farm exporter and accounts for as much as 40 percent of the world’s rice exports. Agriculture has been growing at a trot of 4-5 percent annually. To protect Indian farmers from a flood of imported farm goods, high tariffs have been in place.
The US which currently sells walnuts and other dry fruits as well as luxury fruits such as apples in India, wants these barriers to be lifted to gain access to the lucrative Indian market. However, it must be remembered that meddling with farm policies is far more difficult than making changes in e-commerce rules. Though agriculture contributes about 20 percent of India’s gross domestic product (GDP), as much as 46-50 percent of the workforce is dependent on this sector.
Removal of farm tariffs followed by a flood of US and foreign products is bound to face resistance from farmers’ organizations. The recent rolling back of farm laws after years of protest is still strong in the nation’s memories.
A taste of what might come was on display when the US vice president’s India visit sparked protests in villages with his effigy being burnt and farmers holding signboards: “Go back, Vance.”