The Future of India’s Trade Policy: Balancing Tariff Reductions and Economic Growth
Introduction
Trade has always been central to economic progress, and for a fast-growing economy like India, it plays a crucial role in shaping its global influence. As the world undergoes economic shifts marked by increasing protectionism, India must recalibrate its trade strategy to remain competitive. The EU and the US, two of India’s largest trading partners, are seeking deeper trade ties through FTAs, but their demands pose both opportunities and risks. While FTAs can open doors to larger markets, they may also expose domestic industries to foreign competition. Thus, India’s challenge is to strike the right balance—expanding trade while safeguarding key sectors that support employment and self-reliance.
The EU and US: India’s Key Trading Partners
Despite the widespread belief that China or the US is India’s largest trading partner, the EU holds this position, with bilateral trade reaching nearly $140 billion in 2024. This figure surpasses India’s trade with both the US and China, which each stood at around $119 billion. Strengthening trade relations with the EU is, therefore, an economic priority. The EU’s interest in India is driven by its need to diversify supply chains amid growing tensions with China and its search for new markets post-Brexit. India, with its massive consumer base and thriving industrial sector, is a natural trade partner.
India’s trade relationship with the US, though significant, faces more complexities. The Trump administration’s protectionist stance resulted in increased tariffs on Indian exports, and while the Biden administration made some policy reversals, challenges persist. The US seeks greater access to India’s agricultural and dairy markets, but India is cautious, wary of the impact on its farmers. At the same time, Indian industries such as textiles and pharmaceuticals are advocating for lower US tariffs to enhance their competitiveness. Both the EU and US FTAs have the potential to reshape India’s trade landscape, but only with a well-calibrated approach.
Challenges in Trade Negotiations
FTAs with powerful economies bring their own set of challenges. The EU and US demand greater access to India’s agricultural and dairy sectors, which are highly sensitive due to their socio-economic importance. India has long maintained high tariffs on agricultural imports to protect its farmers from subsidised foreign products. The dairy industry, in particular, is vulnerable to competition from European cheese and milk powder. Sudden tariff reductions in this sector could disrupt local production and impact millions of livelihoods.
Non-tariff barriers also pose difficulties for Indian exporters. The EU enforces strict carbon emission and quality control standards, affecting Indian exports in steel, aluminium, and agricultural products. Meanwhile, the US places regulatory restrictions on India’s pharmaceutical and IT sectors, limiting their access to American markets. Though these are not direct tariffs, they create significant trade obstacles. Addressing such non-tariff barriers is crucial for India to secure fairer trade agreements.
Sectors Ready for Tariff Reductions
While some industries require protection, others are competitive enough to benefit from tariff reductions. Lowering trade barriers in these sectors could help India expand its market access and improve its global trade standing.
India’s electronics and industrial goods sector is already prepared for zero tariffs, particularly in trade with the US. Reducing barriers in this industry would allow Indian manufacturers to compete more effectively against China. The textile and apparel industry, which employs millions, faces stiff competition from countries like Vietnam and Bangladesh that enjoy lower tariffs due to earlier FTAs. A well-negotiated trade agreement with the EU could help Indian textile exporters compete on equal footing.
India’s alcoholic beverages industry has gained global recognition, particularly in gin and beer. Lowering tariffs on these products could enable Indian brands to expand their presence in international markets while allowing for healthy competition at home. Similarly, India imposes steep tariffs on luxury automobiles, despite having no major domestic presence in this segment. Reducing duties on high-end vehicles would benefit consumers without threatening local manufacturers.
Key Industries Requiring Protection
While India can afford to lower tariffs in certain industries, some sectors need continued protection to ensure economic stability.
Agriculture and dairy remain at the heart of India’s economy, employing nearly half of its workforce. Sudden tariff reductions could expose small farmers to cheap foreign imports, leading to mass unemployment. Instead of broad tariff cuts, India must adopt a selective approach, keeping tariffs on essential crops and dairy products intact while easing import restrictions on non-essential commodities such as pulses, which are already in short supply.
The steel and aluminium industries also require safeguards. Indian steel exports face hurdles due to strict EU carbon emission norms. Unless India aligns its industrial policies with these environmental standards, its exports may struggle despite tariff reductions. A balanced approach, ensuring compliance with global regulations while protecting domestic production, is necessary.
India’s IT and digital trade sector faces barriers due to the EU’s reluctance to recognise India as a data-secure country. This limits Indian IT firms from processing European data, affecting business operations. Resolving this issue is essential for strengthening India’s digital trade ties with Europe.
India’s Expanding Trade Partnerships
Beyond the EU and US, India is actively engaging in FTAs with other nations to diversify its trade portfolio. The India-Australia Trade Agreement has already reduced tariffs on Australian coal, wines, and lentils while boosting Australia’s market access for Indian textiles, pharmaceuticals, and engineering goods. The India-UAE Trade Agreement is another success, as the UAE is India’s third-largest trading partner. Recent tariff reductions on gold, petroleum, and jewellery have strengthened economic ties while providing easier access for Indian exports.
These agreements highlight India’s flexible trade strategy—lowering tariffs selectively while maintaining essential protections. By forging stronger partnerships beyond traditional markets, India can reduce its dependence on any single country, thereby securing a more resilient global trade position.
Geopolitical Factors in Trade Policy
Trade policy is not just about economics; it is also shaped by global political dynamics. The rising tensions between the US and China have created a unique opportunity for India to position itself as a key alternative manufacturing hub. Many Western firms, wary of over-reliance on China, are looking to invest in India under the “China Plus One” strategy.
Additionally, environmental policies will play an increasing role in trade negotiations. The EU’s carbon neutrality goals mean that Indian exporters must comply with stringent environmental standards to maintain market access. Investing in green technology and sustainable manufacturing will be vital for India to remain competitive in future trade agreements.
Conclusion: A Strategic Trade Approach
India’s evolving trade policy is at a pivotal moment, requiring a careful balance between liberalisation and protectionism. FTAs with the EU and US offer significant opportunities, but India must proceed with caution, ensuring that tariff reductions do not harm sensitive industries.
The best approach is selective liberalisation—reducing tariffs in competitive sectors such as electronics, textiles, and alcoholic beverages while maintaining protections for agriculture, steel, and digital trade. Additionally, addressing non-tariff barriers and aligning India’s regulatory standards with global norms will be essential.
