Domestic Growth Momentum Builds, but an India–US Trade Deal Remains Crucial

 India’s economy continues to display strong domestic momentum, supported by government reforms, resilient consumption, and improving high-frequency indicators. However, recent tariff pressures from the United States and a widening trade deficit highlight the importance of a future India–US trade agreement.

In this blog, we break down the current economic landscape, the factors influencing India’s trade and growth dynamics, and why a bilateral trade deal with the US has become increasingly vital.

1. A New Milestone in India–US Energy Trade

Indian PSU oil companies recently finalized a 1-year structured import contract for 2.2 million tonnes of LPG from the US Gulf Coast for 2026.
This accounts for nearly 10% of India’s total LPG imports, marking the first structured US LPG contract for India.
This move comes at a time when India is diversifying energy sources and strengthening strategic supply chains.

2. Trade Deficit: Widening, Yet Manageable

India’s trade deficit widened sharply in October 2025, rising by 29.6% from the previous month to reach almost USD 42 billion.

Why the Deficit Rose

  • Exports dropped 5.5%, mainly due to tariffs imposed by the US.

  • Imports increased 11%, driven heavily by festive-season demand.

Impact of the US Tariff Hike

The US imposed an additional 25% tariff on Indian goods in August 2025 (total tariff: 50%), linked to India’s imports of Russian oil.
In the two months following:

  • Exports to the US fell 8.1%

  • Overall exports declined 1.5%

  • Imports jumped 23.5%, driven by a doubling of gold and silver imports (79.8% of the total increase)

Despite these pressures, services exports rose 23.5%, helping cushion the impact on the overall trade deficit.

3. Government Interventions Supporting GDP Growth

To counter external pressures, the government has taken proactive fiscal and monetary steps.

Fiscal Measures

A major GST reform came into effect on September 22, 2025, simplifying slabs to:

  • 5% and 18%, plus a 40% demerit rate on luxury/sin goods.

This reform has already begun boosting consumption indicators, such as record automobile registrations during the festive season.

Monetary Measures

The RBI has cut the repo rate by 75 bps in 2025:

  • 25 bps in February

  • 50 bps in June

Lower interest rates and improved liquidity have led to a visible improvement in credit demand, especially retail credit.

4. How Tariffs Are Affecting GDP

India’s GDP equation —
Consumption + Government Expenditure + Investments + Exports – Imports —
shows that reduced exports directly weigh on growth.

However:

  • Higher consumption (aided by tax cuts and liquidity)

  • Stronger credit flow

  • Robust domestic demand are helping offset the pressure from slower exports.

5. The Big Picture: Why an India–US Trade Deal Is Essential

The domestic economy is showing early signs of stabilization, but external challenges persist.
A comprehensive India–US trade agreement would:

  • Neutralize tariff pressures

  • Stabilize export competitiveness

  • Strengthen supply chains

  • Support long-term GDP expansion

Given current macroeconomic conditions, such a deal remains critical for unlocking India’s next phase of growth.

Conclusion

India’s domestic momentum is strong, supported by decisive government actions, resilient services exports, and improving consumption trends. While the widened trade deficit remains a concern, it is manageable in the near term.
The missing piece, however, is an enduring India–US trade partnership—a factor that could significantly strengthen India’s external position and enhance long-term economic stability.

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