Trump unexpectedly announced an Indo-US trade deal on Monday whereby US tariffs on Indian imports will drop to 18% while India will reduce its tariffs on US imports to zero. He also said that Modi agreed to stop buying Russian oil, which he’ll replace with US and possibly Venezuelan oil, while also pledging to buy $500 billion of American energy, technology, agricultural goods, coal, and other products. For his part, Modi confirmed that a deal had indeed been reached, but he didn’t confirm the details.
If Trump accurately conveyed them, and he was reportedly wrong in claiming late last year that India had already stopped buying Russian oil, then the Indo-US trade deal would certainly be historic.
For starters, a little less than half of the Indian population (42%) is employed in the agricultural industry, so tariff-free US imports of such products could ruin some of their livelihoods and lead to these rural folk moving to the cities. The potential socio-economic turbulence could lead to political unrest if improperly managed.
That could be offset if more investment from the US and the EU, which reached a trade deal with India last month, provides new employment opportunities. While a gamble, Modi might have calculated that it’s worth taking these risks for macroeconomic, regional security, and geo-economic reasons.
The first aims to turbocharge India’s GDP growth, which was already expected to be 7.4% this year despite the US’ 50% tariffs at the time, thus helping it become the world’s third-largest economy by 2030 or earlier.
As for the regional security dimension, this relates to restoring India’s role as the US’ top South Asian partner via economic diplomacy after rival Pakistan replaced it last year, thus averting the scenario of the US weaponizing Pakistan and their shared junior Bangladeshi partner as proxies for derailing India’s rise. The aforesaid economic diplomacy segues into the tertiary geo-economic reason that can be speculated as accounting for why Modi might have made such significant compromises for a deal with Trump.
The US’ punitive 25% tariffs for continuing to import discounted Russian oil are no longer worth the economic cost now that the US is offering India similarly priced Venezuelan oil. Meanwhile, the US’ threatened 25% tariffs for doing business with Iran and concerns about its stability render the North-South Transport Corridor through its territory en route to Russia unviable for the time being. The effect of this geo-economic pressure might have understandably pushed India to prioritize a deal with the US.
If Trump’s details about his deal with Modi are correct, then India is recalibrating its grand strategy in the Western direction, albeit due to economic coercion.
Potential implications of this policy shift could be a reduced focus on BRICS, decelerated diversification from the dollar, more defense deals with the US, and resultant difficulty in maintaining its incipient rapprochement with China.
Russia would also be thrown into a grand strategic dilemma if India does indeed stop importing its discounted oil.
In order to stabilize its budgetary revenue and the ruble, Russia could either rely on China to replace its lost Indian oil market at the risk of becoming too dependent on it or agree to tough compromises with the US over Ukraine for phased sanctions relief that would gradually return its oil to the global market.
The consequences would sharply shift the global systemic transition in China’s or the US’ favor, and if the Indo-US trade deal prompts Russia to make this epochal choice, then it would truly be historic.
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