India’s refusal to accommodate US demands for tariff concessions on farm and dairy products was to help Modi harvest rural votes in the coming elections.

By P.K.Balachandran

Colombo, July 31 – US President Donald Trump said on Wednesday that the United States will impose a 25% tariff on goods imported from India starting on August 1. He also said that India will face an unspecified penalty on August 1, without elaborating on the amount or what it was for.

“While India is our friend, we have, over the years, done relatively little business with them because their Tariffs are far too high, among the highest in the World, and they have the most strenuous and obnoxious non-monetary Trade Barriers of any Country,” Trump wrote in a Truth Social post.

“They have always bought a vast majority of their military equipment from Russia, and are Russia’s largest buyer of ENERGY, along with China, at a time when everyone wants Russia to STOP THE KILLING IN UKRAINE — ALL THINGS NOT GOOD!” Trump added, giving decision a geopolitical context.

India’s commerce ministry, which was negotiating with the US is yet to comment. But the leader of the Indian delegation, Minister Piyush Goyal, had said many times that India would not give up its vital interests to sign a trade deal with the US. By vital interests he essentially meant the farm and dairy sector.  

The farm and dairy sector is important for garnering votes in Indian elections. “India lives in its villages” Mahatma Gandhi had said, highlighting the fact that most Indians live in the villages. Rural folk are the single largest body of voters in elections.

Without mentioning any sector, Finance Minister Nirmala Sitharaman had assured Indians that India would sign a “beautiful” agreement with the US, by which she meant a pact safeguarding the agricultural sector.   

In their talks with the US negotiators, Indian officials stubbornly resisted opening the Indian market to imports of wheat, corn, rice and genetically modified soybeans from the US, citing risks to the livelihood of millions of Indian farmers.

Industrial Sector Hit

Trump’s new tariffs are expected to hit India’s industrial exports to the US, which were estimated to be around US$ 87 billion in 2024. They included labour-intensive products such as garments, pharmaceuticals, gems and jewellery, and petrochemicals.

The US currently has a US$ 45.7 billion trade deficit with India and it has been keen on reducing it. India levies nearly 39% tariff on US agricultural products, with rates climbing to 45% on vegetable oils and around 50% on apples and corn, Reuters reported.

Speaking on the US tariff hike to Reuters, a spokesman of Indian gem industries said: “The Indian gem and jewellery sector, in particular, stands to be severely impacted. The United States is our single largest market, accounting for over US$ 10 billion in exports – nearly 30% of our industry’s total global trade.”

N. Thirukumaran, General Secretary of the Tiruppur Exporters’ Association in Tamil Nadu said that India will be losing its competitive edge vis-à-vis Vietnam. S.C. Ralhan, President of the Federation of Indian Export Organizations said that exports of textiles, footwear, and furniture will become uncompetitive in the US market vis-à-vis Vietnam and China.

According to the Manufacturers’ Association of India, Indian products will become 7% to 10% more expensive than those from its competitors.

Sakshi Gupta, Principal Economist of the HDFC bank in Gurugram near Delhi said that the higher US tariffs will cause volatility in the forex market with mounting depreciation pressure on the rupee.

What India Could Do?

India could stick to its high tariffs on imports from the US. It could even raise them. But will India do it, given its dependence on the US for its strategic protection against China?

What the Narendra Modi government is most likely to do is to allow India’s industrial sector to find ways of meeting the US tariff hike. It would rather support the agricultural and dairy sector, which is electorally larger and more important.    

Though agriculture and its allied areas contribute only 16% to India’s US 4 trillion economy, farmers remain the most powerful voting bloc for all parties, including Modi’s Bharatiya Janata Party (BJP). The Modi government knows the power of the farmers as they had agitated and halted its bid to commercialise the farm sector in 2021.

The US has been pressing India to open its market to a wide range of American products, including dairy, poultry, corn, soybeans, rice, wheat, ethanol, citrus fruits, almonds, pecans, apples, grapes, canned peaches, chocolates, cookies, and frozen French fries. While India is willing to grant greater access to US dry fruits and apples, it is holding back on corn, soybeans, wheat, and dairy products.

Cheaper imports from the US would drive down local prices of essential food grains, handing the opposition Congress party a fresh opportunity to attack the government. New Delhi has traditionally kept agriculture out of Free Trade Agreements. It had refused to join the Regional Comprehensive Economic Partnership (RCEP) helmed by China so that its farm sector is not exposed to foreign completion.  

Indian Farmer Needs Support

The issue of votes apart, the Indian farmer needs support.  The average Indian farm is just 1.08 hectares, compared to 187 hectares in the US. In the dairy sector, the average herd size in India is two to three animals per farmer, compared to hundreds in the US.

The Indian farmer relies on techniques passed down through generations which are very inefficient, in sharp contrast to US farmers who use cutting-edge equipment and AI-driven technologies have raised productivity. Therefore, the typical Indian farmer cannot compete with his US counterpart.

Furthermore, India does not allow genetically modified (GM) food crops, while most US corn and soybean production is GM-based. Dairy remains a sensitive issue in India as Indian consumers are particularly concerned that cattle in the US are often fed with animal by-products, a practice that conflicts with Indian dietary taboos.

India has an Ethanol Blended Petrol (EBP) program. The EBP is meant to cut dependence on energy imports by blending domestically-produced ethanol with gasoline. Importing US ethanol would undermine domestic ethanol companies. The EBP helps manage surpluses of rice, sugarcane and corn by diverting them to ethanol production. Allowing imports of US ethanol would be a serious setback for India’s emerging distillery sector.

Door is Not Shut Yet

However, both Indian and US sources have been quoted in the media as saying that the trade deal has only been stalled and not abandoned. The US has to find ways of reducing the trade gap with India. It would be hard for President Trump to abandon the US farm sector totally and be seen as capitulating to India, a country which he describes as the “King of Tariffs”.

India could also make a few concessions to the US as it needs defence and industrial cooperation with the US, especially in modern technologies, for its competition with China.

Advantage Modi

But for now, with the trade deal either off or put on hold, it is advantage Modi. By not entering into a hurtful trade pact, even under tremendous pressure from the world’s only super power, Modi has put Trump in his place. That will help him face savage attacks from the opposition parties for not standing up to Trump’s  claims in regard to the May India-Pakistan war.

Trump had claimed 29 times that he had brought about a ceasefire between the two nuclear-armed neighbours by holding a trade deal as a bait. Trump had also feted the Pakistani army chief Field Marshal Asim Munir at the White House and hinted that India had lost 4 to 5 aircraft in the war even as Modi was claiming a stunning military victory over Pakistan.  

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