US-India Trade Tensions: New Delhi's Rebalancing Act

Our analysis determines that the Government of India will respond to the recent increase in U.S. tariffs with a rebalancing act from the Trump administration’s series of economic moves and political jabs. Various costs for Delhi in the domestic labor market and political pressures may result in a fallback on its "strategic autonomy" doctrine, defying Washington.

Domestic Costs of the US-India Trade Deal are High

A wall was hit in US-India trade negotiations, because New Delhi sees political costs to opening its dairy and agriculture sectors to US competition as too high. It is a red line that PM Modi with the National Democratic Alliance (NDA) coalition government will not cross. Agriculture is the biggest employer in India: employing ~45-46% of the Indian workforce. While India industrializes, its administration is very cautious of the heavy-handed effects of a sudden opening of markets. In 2020-21, it attempted to reform the agriculture industry by opening it up to free competition and privatization, removing government intermediaries, through the 2020 Farm Bills.

Severe political pressure from mass-protests in northwestern India through 2020-21 jolted the second Modi administration (2019-2024), then in absolute majority, into repealing the laws.

The central government in New Delhi likely perceives a threat: it being held responsible by the Opposition for jolts to the sensitive farmer workforce, if American competition entered the market. The employment effects could take several months, by which time India would reach the halfway mark– close to the campaign cycle for the 2029 Indian general election, and many key domestic state elections in 2026 and 2027. Too high a cost for a government already relying on political coalition partners, in too sensitive a sectoral landscape.

Prime Minister Modi and President Trump, in Washington, D.C., February 2025. (Reuters)

A Renewed Relationship with Pakistan Has Irked New Delhi

A first in many years of US-India relations, a US President has explicitly offered to settle the deadly strategic and territorial conflict between India and neighbor Pakistan, which saw serious confrontation in May, with trade. The President’s various advancements in ties to Islamabad and its military leadership has hit a well-known political nerve in India.

In India, rapprochement with Pakistan is a bipartisan taboo. To the Indians, until Pakistan’s military and intelligence end patronage of Islamist non-state terror actors that target India, there can be nearly no means of bilateral cooperation. Under Modi (2014–) Indian foreign policy is increasingly hawkish, perceiving Pakistan as entirely belligerent to India’s national security. The April 22 killing of 26 tourists in northern India has triggered a total shutdown from Delhi towards cooperating with Islamabad on any fronts. The Indian public is fatigued from terror attacks, and largely holds a negative of its neighbor due to the same.

Since then, publicized developments in President Trump’s relationship with Pakistan includes hosting Pakistan’s military chief, Field Marshal Asim Munir in Washington, only 5 weeks after fighting with India, various public remarks claiming brokering peace and a ceasefire through trade– which Delhi appears to deny, and recent tweets stating US investment in Pakistan’s oil reserves. All of these are seen in sour taste in India, where the contrary was expected due to US-India alignment on counter-terrorism and Pakistan’s alliance with China.

By opting to offer a non-security solution to a security problem, and explicit outreach to Pakistan’s military, along with US interest in a sector it is already self-reliant on (oil), Washington has signalled playing hardball on a trade deal with India. Delhi’s explicit commitment to its Strategic Autonomy doctrine, engrained into its foreign policy infrastructure and, consistent through the Manmohan Singh and Modi governments – will likely result in a fallback procedure on the same.

India’s Strategic Autonomy Posture

A significant frustration of the Trump administration with India includes a continued purchase of Russian oil. However, according to the Indians, their energy independence is extremely critical to industrializing and maintaining economic growth. It is in line with their long-term strategy – characterized by autonomy.

According to New Delhi, India's energy purchases have followed the price-point, instead of strategic interest - hence its large purchases of cheaper Russian oil amidst its invasion of Ukraine. However, breaking this pattern in a nod to Washington, in early 2025, Indian purchases of US energy shot up by 50%, even as it refused to stop purchasing Russian oil for its economic needs. As of August 4th 2025, President Trump has threatened heightened tariffs in addition to the 25% baseline on India due to its Russian oil dependence, and explicit refusal to change course, despite Russia’s continued war in Ukraine.

Rebalancing

We assess that India will respond with broader rebalancing, in alignment with the calculus of autonomy it has revealed it holds dear, and could signal conditional alignment with the US.

New Delhi could see merit in accelerating trade agreements with the European Union, Australia, and UK, lowering restrictions to signal a welcome to non-interference in its domestic sensitivities. While India’s bureaucracy is cautious to move quickly, this could also be a moment for internal reform to reposition the Indian export economy for partners in ASEAN and Africa.

This is also a difficult moment for actors involved in US-India ‘COMPACT’, “Catalyzing Opportunities for Military Partnership, Accelerated Commerce and Technology”. The Indian Air Forces’ plans to procure a large order of fighter jets could delay negotiations with American private contractors, and look to others, like France. Other US-India defense deals nearing completion, like the Indian purchase of six Boeing P-81 long range surveillance aircraft, could be delayed.

India’s coordination with the BRICS bloc could deepen. Another founding member, Brazil, faces tariff threats from Washington for its domestic Supreme Court trial against former President Bolsonaro. Seen in Brasilia as daylight foreign political interference, the longer-term investment of the two in BRICS as a strategic platform, could deepen. The India-Brazil-South Africa (IBSA) bloc-within-a bloc is a notable subgrouping inside BRICS – all three being democracies. With South Africa having faced heat early in the Trump administration when the White House accused Pretoria of racist policies, and invited White South Africans to claim refugee status in the US, all three face a domestic political challenge colored by ties to Washington. The mutual strain could bring these Global South states to the drawing board.

Expectations for US-India Relations in the Short Term

As is with many developments in the current US administration’s foreign policy, a behind-the-scenes deal or compromise by either partner could completely shift the overall mood, but this series of decisions will act as foundation for pessimism from India’s foreign policy world for the remainder of the Trump administration. Still, the US and India are large enough actors that joint platforms of public utility will continue, and withstand this period of volatility.

The equation of trust has changed. As Evan Feigenbaum, former Deputy Assistant Secretary of State in the Bush administration, puts it:

A partial opening of India’s agriculture sector, like a compromise from Delhi on processed goods like cheese or wine, could relieve some tensions. But with political cost implications of revived US-Pakistan cooperation, domestic pressure on Prime Minister Modi remains high. India’s continued oil sales with Russia are perceived as a defiance of the Trump administration’s high priority to end the war in Ukraine.

It does not appear likely for either of the following: that Washington would backtrack on its threat to India, or that India would break its long-term posture on its energy independence.

Amidst looming tariffs, US-India cooperation on other fronts excels. The NASA-ISRO co-developed ‘NISAR’ satellite was launched on 31 July, 2025, and will study climate change with the most advanced sensors in space. Shared maritime security objectives will likely advance, especially in the Indian Ocean. India’s interest in refitting and modernizing its military will continue to draw opportunities from the US. Russia’s fragile war economy and growing junior partner status to China will continue to draw India away from it - structurally meeting Washington’s long-term goals in US-India ties.

However, this crisis moment in US-India relations also poses a deeper question on Washington’s commitment to its ‘Pivot to Asia’ doctrine, and challenges the shared assumptions that Washington and New Delhi have made about mutual security and economic goals.

A critical question for New Delhi at this stage, is about its approach towards Beijing, and the kind of partnership it wants to achieve with the strategic giant to its north. India could look to easing economic restrictions on China, in line with the July reopening of tourist visas to Chinese nationals, after a 5 year hiatus since the Galwan Valley border clashes. The India-China relations are in a complicated stage, certainly improved, even as the bruises from the 2020 clashes, and Chinese patronage of Pakistan, especially in May, remain tender.