A flurry of free trade agreements with the UAE, Australia, the European Free Trade Association and the UK signals a more outward-looking Indian trade policy.

The transformation is only partial. On 9 July 2025, India’s negotiations for a possible exception from US President Donald Trump’s on-again, off-again tariffs may determine whether India is ready to move beyond its defensive economic posture on trade.

India must resolve longstanding trade disputes with the US or face punitive tariffs of up to 26% on key exports, including garments, steel, pharmaceuticals and gems. Washington’s disputes — focused on digital services taxes, agricultural and dairy market access and cross-border data regulation — echo the unresolved tensions that drove India’s exit from the Regional Comprehensive Economic Partnership in 2019 over perceived harms to domestic industries. After months of negotiations, both sides appeared close to a deal in early July 2025. But talks have quickly soured.

India’s important presence in reorganising global supply chains amid a potential US–China decoupling also gives it greater leverage in achieving a mutually beneficial outcome in trade discussions. An agreement with Washington could focus on increasing US agricultural exports and bilateral investment in semiconductors, defence and clean technology.

New Delhi’s caution still persists. Minister of Commerce and Industry Piyush Goyal, reiterating a long-held position, has stressed the need for “balanced agreements” and warned against India becoming a “dumping ground”. As Washington pursues resolution of its oft-repeated concerns over trade deficits and Chinese transhipment, India’s insistence on high tariffs and its persistent regulatory opacity continue to constrain its negotiating strength. This comes at a time when the US itself has introduced significant volatility into the global trade system, applying unilateral tariffs on even its closest partners, raising broader concerns about the durability of bilateral deals.

India’s bilateral free trade agreements with the UAE and Australia show promise. Exports to the UAE climbed from US$31.6 billion in FY 2023-24 to US$36.6 billion in in FY 2024-25, making it India’s third-largest trading partner. Exports to Australia also rose, from US$6.95 billion in FY 2023-24 to US$8.58 billion in FY 2024-25. Still, these agreements remain shallow, focused largely on tariff reduction, with limited movement on services, public procurement or investment liberalisation. The challenge for India is to convert this momentum into more substantive reform and multilateral trade alignment.

The European front presents a parallel opportunity – and risk. The European Union’s Carbon Border Adjustment Mechanism, fully operational from 2026, places a carbon cost on imports such as steel, aluminium and cement unless exporters meet EU environmental standards. India exported about US$7.9 billion worth of goods covered by the Mechanism to the European Union in FY2022-23 – approximately 8% of its total EU exports. Indian officials have objected to the mechanism, calling it “discriminatory”, but have shifted from confrontation at the World Trade Organisation to direct negotiations.

The long-stalled India-EU free trade agreement has regained some momentum. EU officials warn that if substantial progress is not made in the near term, it could fall off the agenda under more protectionist leadership. For India, delaying alignment with climate-linked trade norms could mean ceding future rule-setting power to others.

India’s structural dependence on China adds another layer of complexity. In the 2024-25 financial year, India-China trade exceeded US$125 billion, with China remaining the primary source of components for electronics, pharmaceuticals and industrial machinery. A sudden 53% drop in Chinese exports of rare earth magnets has also disrupted Indian electric vehicle production. Rare earth magnets are critical inputs for electric motors. The disruption has caused delays and cost spikes for several Indian electric vehicle manufacturers.

India’s trade policy reflects this unease. India’s average applied non-agricultural tariff stood at 13.5% in 2023 — among the highest in the G20 — compared to 3.4% in the US and less than 5% in many Southeast Asian economies. Customs processes remain burdensome and investor confidence is undermined by regulatory opacity. India improved its ranking in the World Bank’s Logistics Performance Index from 44th in 2018 to 38th in 2023 but it still trails Southeast Asian competitors.

The opportunity cost of New Delhi’s hesitancy towards domestic economic reform is high. A recent study from the Peterson Institute for International Economics — modelling medium-term productivity-enhancing policy — projects annual GDP growth gains of 0.2 to 0.5 percentage points in the scenario of structural reform, which would represent a meaningful boost to India’s growth trajectory. Without it, India risks stagnating at 6% to 6.5%, insufficient to absorb its labour force or sustain investment momentum.

India’s Article IV consultation with the International Monetary Fund forecasts real GDP growth of 6.5% in both the 2024-25 and 2025-26 financial years, but warns that without structural shifts, India may fall well short of the pace required to absorb its growing labour force or leverage its demographic dividend to grow consistently at or above 7%, enabling the country to double the size of its economy every decade.

The notion of “strategic autonomy” — often used to justify India’s cautious global integration — may now require reinterpretation. In today’s interconnected trade environment, autonomy is no longer preserved by staying out, but earned by engaging constructively through multilateral forums from a position of regulatory and industrial strength. This refers to India’s ability to offer predictable rules, low compliance costs and high-quality infrastructure for production and trade – conditions that increase negotiating power and long-term credibility. In practical terms, this could mean leveraging multilateral forums to influence digital trade norms or climate-linked standards, rather than relying solely on bilateral or domestic instruments.

India’s trade progress is evident. But transcending tactical deals to initiate multilateral alignment with trade rules will require diplomatic agility. It will also require bold domestic policy reform. New Delhi’s negotiations with the US may fail to offer a reprieve from Trump’s tariffs. But they may come to forecast India’s trade trajectory, investor confidence and standing as a credible rule-shaper in the global economy.

Looking ahead, India must weigh its options – double down on WTO reforms, deepen regional pacts with ASEAN and the European Union or modernise domestic trade infrastructure to project readiness. Each path entails costs, but also the potential to redefine India’s role in the global trading order.

Republished from EastAsia Forum, 26 July 2025

The views expressed in this article may or may not reflect those of Pearls and Irritations.