As India’s trade team races against time to reach an interim deal with the US on tariffs, the big challenge before Indian negotiators will be to protect the country’s farmers and the lakhs of micro and small enterprises (MSMEs).
Trade representatives from the two sides have held several rounds of talks, including one round last Tuesday. The big hurdle to an early settlement appears to be resistance from both sides on the question of opening up India to US farm produce.
While a comprehensive India-US trade agreement seems next to impossible before Donald Trump’s across-the-board 26 percent tariffs kick in on 9 July, an interim deal for the near-term may stave off the US imposts for some time.
The US side is in an aggressive mood. The United States is India’s largest trading partner, and the balance of trade with India is heavily tilted in the latter’s favour. Of the $129 billion in Indo-US trade in 2024, US exports to India stood at $41.8 billion, while India’s exports to the US was more than double at $87.4 billion.
Agriculture is vulnerable
One can see the US’ hard line in the negotiations. It has pushed back on India’s demand that the current 10 percent tariffs not be applied to products from labour intensive industries such as leather, electronics and gems and jewelry. Reuters has quoted US officials who point out that, if the deal with Britain has not exempted US’ global, baseline 10 percent tariff, it is unlikely India will get that benefit.
India’s trade team has rightly said the core of India’s agriculture – rice, wheat and other staple and dairy produce, is non-negotiable. Farmers as it is face unremunerative prices in the home market, and the government has to prop them up returns by offering minimum support price (MSP). If this is abandoned, and cheap US grain allowed to flood the Indian markets, it will spell ruin for the vast body of farmers. Moreover, recent years have seen farmers agitating for better support prices. Caving in to US demands will mean suicide for the Indian political class.
Indian negotiators seem to have come up with a three-tier formula: first, a red ‘no compromise’line on dairy and staple produce like wheat and rice; second, marginal concessions on fruit products such as apple and pears which have a more restricted market, and whose producers in Himachal and elsewhere have better bargaining clout. Finally, the third category of exotic products like almonds, walnuts, pistachios and blueberries, consumed by the rich, that can be opened up by reducing import tariffs.
Protecting micro units
Indian negotiators will also have to fight hard for the micro and small enterprises (MSMEs) who are dependent on exports and who import components, especially in the electronic sector. Being labour intensive, and with small margins, high tariffs will put lakhs of jobs at stake.
It is estimated vulnerable MSMEs and mid-corporates are already at risk of defaults of Rs 21,800 crore worth of loans. These units have low Return on Equity (ROE), lower profitability, and less buffer to absorb increased costs such as tariffs.On the other hand, Indian exporters, particularly MSMEs, are currently facing pressure from US customers to absorb the increased costs from tariffs. With low margins, many of these units may go belly up if the 26 percent tariffs come in.
If India decides to respond with retaliatory tariffs, it could create more challenges for Indian MSMEs who are dependent on importing raw material, machinery, or components from the U.S. This sector is in a precarious state, and needs to rework its business plans with the domestic market as its foundation.
There is a growing perception the US is not keen to dilute its stand, In fact, in the latest round of talks, it has demanded that India open up its market to genetically-modified crops too. It is not that US negotiators don’t understand the politically sensitive nature of opening up protected farm produce. “The US understands the political influence of farmers and ranchers. There are the kind of people who have lots of political voices and we understand that,” said US commerce secretary Howard Lutnick.
But now, having let the genie out of the bottle, Lutnick and his colleagues have to also answer at home to the loud US trade associations bent on prizing open the Indian market. The US Wheat Associates, the Illinois Corn Growers Association, the American Soyabean Association, the North American Blueberry Council and the Almond Alliance have all united behind the US government to get India to reduce local tariffs, and allow entry to US farm produce. There will be no prizes for guessing which side Trump is going to pitch for.
In fact there is a growing perception that India is being slowly cornered to giving in much more, and getting very little in return. Jayant Dasgupta, India’s former ambassador to the World Trade Organization (WTO), has been quoted advocating India take a harder line and not to rush a deal detrimental to the country.
While nobody minds reducing tariffs on whiskey, automobiles and pistachios, India needs to stand firm on not diluting the protection for the farm sector and MSMEs. Together, they perhaps account for 80 percent of India’s GDP.