Modi-Trump pact signals deeper ties, but U.S. trade move keeps India on edge

When Prime Minister Narendra Modi ended his official meeting with U.S. President Donald Trump in Washington on February 13, two official statements stood out. One was an India-U.S. joint statement announcing a new initiative—the "U.S.-India COMPACT (Catalyzing Opportunities for Military Partnership, Accelerated Commerce & Technology) for the 21st Century"—to drive transformative change across key pillars of cooperation. The other was Trump’s announcement of his “Fair and Reciprocal Plan” on U.S. trade with partner countries, including India. Both lacked specificity, though one was positive, while the other sent confusing signals for global trade.

U.S.-India COMPACT

Under the U.S.-India COMPACT, Modi and Trump "committed to a results-driven agenda with initial outcomes this year to demonstrate the level of trust for a mutually beneficial partnership." In other words, India and the U.S. will test the waters with a mini bilateral deal this year, while official-level talks continue toward broader cooperation in key areas of interest—defence, energy security, technology and innovation, trade, and investment, among others.

Interestingly, of the four key pillars mentioned above, the first three are areas where India and the U.S. have been steadily strengthening bilateral cooperation. The joint announcement that India will expand its defence purchases from the U.S. and that U.S. companies will partner with Indian firms to co-produce defence equipment in India was hardly surprising, as this has already been a work in progress. The fact that both leaders called for opening negotiations this year for a Reciprocal Defence Procurement (RDP) agreement highlights the need for India and the U.S. to better align their procurement systems and facilitate the reciprocal supply of defence goods and services.

The leaders’ pledge to increase energy trade and establish the U.S. as a leading supplier of crude oil, petroleum products, and liquefied natural gas was also expected, given India’s perennial demand for these products and the U.S.'s need to find markets for its anticipated production increase, driven by Trump’s fossil fuel-friendly policies. The joint statement also mentions that both leaders committed to enhancing investments, particularly in oil and gas infrastructure, and facilitating greater cooperation between the energy companies of both countries. Now, only an attractive price stands between commitment and fulfilment.

Technology and innovation are another area where India has been increasingly seeking partnerships with the U.S. The Trump-Modi announcement of the launch of the U.S.-India TRUST ("Transforming the Relationship Utilising Strategic Technology") initiative—to catalyse government-to-government, academic, and private-sector collaboration—can be seen as a continuation of these efforts. The focus on TRUST, which aims to promote the application of critical and emerging technologies in areas such as defence, artificial intelligence, semiconductors, quantum computing, biotechnology, energy, and space, could progress to the next level in the coming months.

However, agreements in the fourth pillar—trade and investment—may not be as comprehensive or swift as in the other areas of cooperation. This is where Trump’s second announcement on the day of Modi’s U.S. visit becomes significant.

Fair and Reciprocal Plan

One of the examples cited in the "fact sheet" released by the U.S. government on February 13 to explain Trump’s “Fair and Reciprocal Plan” on trade was that of India. It stated that while the U.S. average applied Most Favoured Nation (MFN) tariff on agricultural goods is 5%, India’s average applied MFN tariff is 39%. It also noted that India charges a 100% tariff on U.S. motorcycles, while the U.S. imposes only a 2.4% tariff on Indian motorcycles. In one case, the U.S. is referring to agricultural sector exports as a whole, while in the other, it highlights tariffs on a single product. What remains unclear is whether the reciprocal tariff will be levied by the U.S. on an entire sector or on a product-by-product basis.

If Trump’s reciprocal tariff is product-specific, there may not be much cause for concern for India. “Given the differences in the export profiles of the two countries, reciprocal tariffs may not have a significant impact. For example, if the U.S. imposes a 50% reciprocal tariff on Indian pistachios because India does the same, India would be unaffected, as it does not export pistachios. Additionally, for 75% of U.S. exports to India, the average tariff is less than 5%,” says Ajay Srivastava, founder of the New Delhi-based Global Trade Research Institute. According to Srivastava, it is India that faces high U.S. tariffs on many labour-intensive goods, such as textiles, garments, and footwear, with rates ranging between 15% and 35% on several products.

A quick analysis by GTRI shows that India-U.S. bilateral trade has been close to $190 billion in recent years, with India’s trade surplus with the U.S. remaining significant only in goods trade. In services, India-U.S. bilateral trade appears to be moving toward balance. With more defence and energy cooperation in the pipeline, the U.S. trade deficit with India in goods trade could also shrink in the coming years. Additionally, technology transfers and related royalty payments could further balance services trade. The anticipated mini India-U.S. deal in 2025 will indicate how far these plans can be mutually beneficial.