CEA Nageswaran: The meaning and significance of the Indo-US trade agreement for India

Many have hailed the strategic thinking and vision behind clinching this agreement soon after the conclusion of the India-EU free trade agreement. Textile manufacturers and exporters in Tiruppur have applauded the agreement as an important breakthrough for their export prospects.

On the other hand, much of the criticism rests on a literal reading of the text. In practice, framework agreements are generally intended to express shared intent and broad orientation, while allowing for sequencing and adjustment over time in the light of evolving circumstances.

Consider the reference to India’s stated intention to purchase up to $500 billion worth of goods from the US over a five-year horizon. Such medium-term indications are best interpreted as signalling an intent to deepen economic engagement rather than as fixed procurement commitments.

They provide a framework for expanding trade in product categories where the US has established global competitiveness and technological depth—particularly in advanced manufacturing inputs, energy-related technologies, high-end capital goods, electronics and semiconductor equipment, and specialized aerospace and defence systems.

Imports in these areas primarily function as productivity-enhancing inputs for domestic value chains, supporting infrastructure expansion, manufacturing upgradation and technological diffusion within India. As the economy grows and diversifies, the absolute value of such imports may increase even as their share in overall economic output moderates over time.

Viewed in this manner, the stated intent reflects a pragmatic and forward-looking approach that balances ambition with flexibility, consistent with the requirements of a large evolving economy.

The interim India-US framework does not alter market access for US soyabeans, maize, dairy or poultry. It is confined to products such as DDGS, feed sorghum, tree nuts, processed fruits, soyabean oil and wines and spirits that are either not produced at scale in India or constitute a marginal share of our agricultural output.

As noted by Harish Damodaran in The Indian Express, any impact is limited to relative price adjustments in specific input markets, rather than the displacement of core farm production, leaving cereals, pulses, sugarcane and milk that define Indian agriculture unaffected.

Some commentary has emphasized the apparent asymmetry between India’s decision to allow zero-duty access to US industrial goods and the tariffs applied by the US on Indian exports.

Such comparisons are incomplete, as the economic significance of tariffs depends not on their absolute level, but on their incidence relative to those faced by exporting countries that compete with India; assessed on this basis, our relative market access position has improved.

Moreover, zero-duty access does not obligate importers to import US goods. Tariff liberalization influences prices rather than purchase decisions. When US products are cost-competitive and meet domestic requirements, lower tariffs reduce input costs for Indian producers and lower prices for consumers; when they are not competitive, trade flows are unlikely to change materially. In this sense, trade outcomes are primarily determined by market conditions rather than by tariff schedules alone.

Where the agreement truly matters is in confidence and capital flows. By restoring a degree of predictability in trade relations with the US, India has put itself back in contention for global portfolio and direct investment flows at a sensitive moment. Without such inflows, financing even a modest external deficit had come under strain and the Indian rupee would have continued to face downside risks in 2026.

Trade access, in this sense, is not just about exports; it is about anchoring macroeconomic expectations. Indeed, with this agreement concluded, India should court foreign investment assiduously, allow the current account deficit to expand slightly to boost capital formation, generate employment, acquire vital technologies and seek to embed itself more widely in global value chains. That is now a top macroeconomic priority and this agreement materially shifts the odds in India’s favour.

This macroeconomic dimension matters because the US remains, by a wide margin, the world’s largest source of final demand. In 2024, US private consumption alone exceeded $20 trillion, dwarfing the combined consumption of the next three big economies. Competitive and predictable access to this market is therefore not optional for India’s export ambitions; it is foundational to manufacturing scale, currency stability and the sustainability of external balances.

There is also a quieter firm-level story. Preferential access to the world’s largest importer is a necessity for India to be a preferred destination for the ‘China plus one’ ambitions of global supply chains. The labour-market implications are equally significant. Labour-intensive sectors such as textiles, gems and jewellery, shrimp exports and automobile components stand to benefit directly. For an economy where employment generation remains a central challenge, this consideration cannot be dismissed as secondary.

Stepping back, the agreement also reflects India’s adjustment to the world as it now exists. With multilateral trade mechanisms largely paralysed, bilateral and selective arrangements shape outcomes. Engaging bilaterally and pragmatically is how outcomes are shaped in global trade. At the same time, the agreement complements India’s broader strategic posture in the Indo-Pacific, sitting comfortably alongside arrangements such as the Quadrilateral Security Dialogue without turning trade into a formal security commitment.

The interim trade framework between India and the US must be evaluated not as a ledger of concessions, but as a choice of economic posture. In an international environment marked by fragmented trade regimes, selective decoupling and heightened capital sensitivity, predictability in India’s most consequential external economic relationship has intrinsic value. It shapes investor expectations, lowers macroeconomic risk premia and conditions India’s ability to scale up its manufacturing and absorb global capital.

Economic agency today is exercised through calibrated integration, not rhetorical resistance. Read in this light, the interim trade framework does not narrow India’s options; it expands them.

The invitation extended by the US to India to join Pax Silica—a strategic initiative to secure and reconfigure global silicon, semiconductor and critical minerals supply chains—reinforces this interpretation. It signals that trade predictability is being treated as a gateway to deeper industrial, technological and supply-chain integration, rather than as a standalone concession.

The real risk, therefore, lies not in engagement, but in the continued mischaracterization of such an engagement as weakness.

In sum, the agreement reached on the framework matters less for what it concedes than for what it enables: investment, scale and a durable place for India within the economic architecture that is now taking shape.

The author is chief economic advisor to the Government of India.