A New Era of Trade: The US-India Deal Elevates India Export and Investment Competitiveness Along with the EU-India

Finally, the long-awaited exhale has come for India's growth and the rupee. The US and India announced a staggering tariff reduction from 50% to 18%. This will provide immediate respite to the Indian economy and its assets, which have been dragged down by the previous 50% tariff affecting USD 45 billion worth of goods, or 1.2% of GDP, primarily in labor-intensive sectors such as textiles and gemstones. In 2025, India performed the worst in Asia in terms of exports, as oil and labor-intensive exports suffered. The rupee, short on USD due to slowing service exports, beleaguered merchandise exports, and capital outflows, has been the worst-performing currency in Asia since 2025. Indian equities and tax revenue collection have been hindered by slowing earnings and revenue as nominal growth slows.What are the details of the deal? The US reduces its reciprocal tariff on Indian goods from 25% to 18% and eliminates the additional 25% punitive tariff imposed for India's Russian oil purchases, resulting in an overall drop from 50% to 18%. India agrees to halt all purchases of Russian oil and shift to sourcing more energy from the US and potentially Venezuela. India also pledges to buy over USD500 billion worth of US products over an unspecified long-term period, covering energy, technology, agriculture, and other sectors. Details in sectors of that India will open to the US or how fast India will halt Russian oil purchase are not available yet. What we do know from other deals such as South Korea’s is that reciprocal tariff rates do fall immediately, and South Korea was able to exclude politically sensitive items such as rice and beef from the deal.Changes to tariff cuts are likely effective immediately, which should support India competitiveness as the tariff level will be lower than that of all Southeast Asian economies except for Singapore (See Chart 1 for details). We expect exports to recover from their lull in 2026 due to the removal of tariffs on affected factors and rising oil prices. Net capital flows have also been affected by tariffs as that caused uncertainty. We expect portfolio and FDI flows to turn positive thanks to the news of tariff relief as investors can take advantage of the US-India deal as well as the big trade deal signed with the EU (See A Big Deal: India and the EU Take a Giant Step Towards Trade, Services, Labor and Investment Liberalization).  While the EU FTA is unlikely to be ratified until at least 2027, expectations of liberalization will further support portfolio investment and FDI into India. We expect India’s real GDP to grow by 6.5% in 2026 and 6.6% in the 2027 calendar year. Given the support from the trade deal, we do not expect the RBI to cut rates in 2026.India’s recent trade deals (the US-India deal, EU-India FTA, and UK-India FTA) demonstrate that its development path includes more trade, specifically aiming outward towards the West. Currently, India’s annual exports to the US and the EU are its largest and combined equal to twice the total exports to BRICS. Meanwhile, India has a trade deficit with BRICS, half of which is with China. In Asia, India has a trade deficit with every country except the Philippines.India recognizes that generating formal jobs for its 608 million-strong labor force (as of 2024), expected to rise to over 720 million by 2040, is crucial. With only 11% of workers in formal employment, any losses in formal jobs have been strongly felt. That provides an impetus to liberalize and reform to help formal employment.One silver lining of Trump’s severe tariffs is that they have pushed the government to finally implement labor code reforms, streamline the Goods and Services Tax (GST), conclude two-decade-long negotiations with the EU, focus the budget on boosting supply chain and manufacturing resilience, and continue to enhance capital expenditure on projects such as expressways, railways, and defense. S&P’s recent upgrade of India’s long-term sovereign rating to reflects improved fiscal governance, and we expect further reforms to pave the way for strong growth