Why an India-U.K. trade deal does not make U.S.-India agreement any easier

Hello, this is Ganesh Rao, CNBC’s senior correspondent, writing from London. This week, I look into India’s willingness and limitations to strike trade deals after I sat down with the country’s Commerce Secretary Piyush Goyal. Enjoy!

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

The big story

Just a week after India secured a landmark free trade agreement with the United Kingdom, U.S. President Donald Trump on Wednesday said he was slapping 25% tariffs on the South Asian country beginning August 1.

Caught between protecting favorable terms in its deal with the U.K. and bargaining for more concessions with the U.S., the Indian government has so far responded cautiously, stating it was “studying its implications.

Trump’s move also marks a sharp reversal from the optimistic tone of recent negotiations with the White House.

When I met with Indian Commerce Minister Piyush Goyal just last week, he told me that talks were “progressing extremely well” and that he was confident India would secure a “preferential tariff compared to our peers and our competitors.”

Blueprint with Britain

The acrimony with Washington, though, is a world away from the positive mood surrounding the Comprehensive Economic and Trade Agreement concluded with the U.K. earlier this month.

The deal is projected to boost Britain’s GDP by £4.8 billion annually and increase bilateral trade by £25.5 billion in the long run, according to the U.K. government.

It could also add £2.5 billion in additional revenues to British government coffers by the end of the day, according to economists at Deutsche Bank.

The deal is reciprocal, meaning the U.K. will eliminate tariffs on 99% of all Indian goods, up from about 73% currently, making the effective tariff rate for Indian exporters close to zero, according to the team led by Sajjid Chinoy, JPMorgan’s chief India economist.

The tariff on Scotch whisky, a major U.K. export, will be cut from a staggering 150% to 75% on the first day of the agreement and will be phased down to 40% over the next decade. Similarly, tariffs on U.K. autos, which can be as high as 110%, will be reduced to 10% under a new quota system.

“I think it is much more than a trade deal,” said Keshav Murugesh, chair of the Confederation of Indian Industry UK India Business Forum and CEO of WNS. “It’s a proper strategic partnership for the future now.”

Some friction persists

Despite the comprehensive nature of the agreement, the final deal does not include an exemption for India from the U.K.’s carbon tax, which is set to begin in 2027.

Goyal said India would oppose any such measures, which he characterized as “non-tariff barriers.”

“India will continue to explore every option that’s available to us under the World Trade Organisation to stop such measures from hurting trade between the two countries,” Goyal said. “We deserve the right to take appropriate actions under international law. “

The two nations also did not reach an agreement on a new investment treaty as part of the trade deal.

India exited its previous investment treaty with the U.K. and several other countries in 2017.

Goyal downplayed the significance of its absence, suggesting that foreign direct investment into India has “only grown by leaps and bounds” despite the lack of such investor protection guarantees.

Crucially, India also did not permit tariff-free access for the U.K.’s diary and agricultural products.

Nearly half of India’s population is involved in agriculture, and government views them as a sensitive voting bloc.

“We are always very sensitive to the interests of our farmers, the interests of our [Micro, Small and Medium Enterprises], and will ensure that our areas of concern are well protected,” Goyal said. [vowed feels a bit strong]

Here, it appears, India’s willingness to open its markets has hit its limits, as U.S. President Donald Trump’s fevered posts on Truth Social indicate.

India is challenged by the complexity of the World Trade Organisation’s “Most Favored Nation” principle. The MFN clause requires that any tariff reduction offered to one country in a bilateral negotiation must be extended to all other WTO members.

If India were to concede to U.S. demands for lower tariffs on sensitive products like agriculture, it would likely be obligated to offer those same terms to competitors like the United Kingdom and European Union, potentially triggering a wider, albeit unintentional, multilateral trade liberalization.

The outcome of negotiations with the U.S. will be a defining test for India’s officials.

“I think people trust India. People enjoy working in India. India is where the action is. India is the fastest-growing large economy in the world today,” Goyal added.

For now, though, action is centered on getting a deal over the line with the United States.

Top TV picks on CNBC

Sakshi Gupta, principal economist at HDFC Bank, said that while government spending and support for infrastructure and capital goods remain strong, consumption growth in India is lagging.

Abhinav Bharti, head of India equity capital markets at JPMorgan, said that capital raising in IPOs usually takes a “breather” when there’s extreme volatility in the secondary markets.

Anubhuti Sahay, head of India economics research at Standard Chartered Bank, said India can absorb the cost of shifting from Russian to U.S. crude oil if sanctions hit.

Need to know

U.S. President Donald Trump announces 25% tariffs on India. In addition to that levy, India will also have to pay a “penalty” for its trade policies, which Trump sees as unfair, and for buying military equipment and energy from Russia, the president announced Wednesday.

India outstrips China in smartphone exports to the U.S. According to data from research firm Canalys, 44% of U.S. smartphones imported during the second quarter were assembled in India, higher than the 25% from China.

Chinese nationals can get Indian visas again. New Delhi resumed issuing tourist visas to Chinese citizens on July 24. It marks a de-escalation in tensions between the two countries, which traded blows in June 2020 over their disputed Himalayan border, according to Reuters.

– Yeo Boon Ping

In the markets

Indian stocks have lost steam this month with the the Nifty 50 index down 3% for the month. The index has risen 4.7% this year.

The benchmark 10-year Indian government bond yield has ticked up slightly to 6.35% mark, flat from last week.

Coming up

August 1: Gold jewelry manufacturer Shanti Gold International IPO, HSBC Manufacturing PMI in July

August 5: Security and surveillance firm Aditya Infotech and non-bank finance company Laxmi India Finance IPOs, HSBC Services PMI in July

August 6: Reserve Bank of India interest rate decision, pre-engineered building firm M & B Engineering, real estate company Sri Lotus Developers and Realty, and securities depository National Securities Depository IPOs

Each weekday, CNBC’s “Inside India” news show gives you news and market commentary on the emerging powerhouse businesses, and the people behind its rise. Livestream the show on YouTube and catch highlights here. 

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