Dr Sunil Mani
Trivandrum, Kerala, May 21, 2025
Long Read
In early 2025, the United States of America implemented a series of far-reaching trade and immigration reforms that have significantly unsettled its longstanding economic engagement with India.
These changes include heightened tariffs on key Indian exports such as engineering goods, textiles, and industrial inputs, justified under expanded national security provisions embedded within Sections 232 and 301 of the US Trade Law. These new duties compound earlier tariffs on steel and aluminium.
In parallel, a tightening of the H-1B visa regime through reduced annual quotas and stricter eligibility and vetting norms has disrupted the flow of high-skilled Indian professionals, particularly in the information technology and pharmaceutical sectors.
Trade and Remittances
Together, these policy changes have delivered a dual shock to India’s external economic position.
First, they have jeopardised goods exports to the United States, which accounted for nearly 18% of India’s total merchandise exports amounting to approximately US$ 118 billion in 2024.
Second, they threaten the flow of remittances from Indian workers in the US, who contribute about 23% of India’s total inward remittances.
These remittances, totalling about US$ 30 billion annually, are a critical source of income for many households in states such as Kerala and contribute nearly 3% to India’s GDP.
The immediate impact on trade has been notable. While Indian exporters have faced tariff increases under the new reciprocal tariffs framework with a baseline of 26% and some products taxed at rates as high as 49% India is not uniquely disadvantaged.
In fact, the United States has imposed even higher tariffs on key trading partners such as Vietnam and Mexico. Vietnam now faces a 46% tariff on its exports to the US, eroding its competitive advantage across a range of manufacturing categories.
Mexico, similarly, is subject to a 25% ad valorem tariff on all exports to the US, including those previously covered under the USMCA Agreement. As a result, the playing field has been significantly levelled, and in some sectors, Indian products may even enjoy a relative edge. Nonetheless, the abrupt policy shift has created pricing and supply chain disruptions across Indian industry, particularly in engineering goods and textiles, which together constitute nearly one-third of India’s exports to the US. CRISIL projects a decline of between 8% and 12 % in exports from these sectors during the financial year 2025-2026.
Repercussions on Immigration
On the immigration front, the repercussions are equally serious.
The unpredictability surrounding H-1B visa approvals has made it increasingly difficult for Indian IT companies to staff client-facing projects on-site in the US.
According to industry group NASSCOM, up to 20 %of high-value US projects face delays or cost overruns due to visa denials or extended processing timelines. The pharmaceutical sector, too, is facing hurdles, particularly in areas that depend on collaboration with US-based regulatory and clinical research entities. As these disruptions grow more acute, firms are being compelled to reconfigure their operations, either by relocating certain functions or deepening their reliance on remote delivery.
There is also concern about the future of remittances. With the pool of long-term Indian residents in the US likely to contract under the stricter visa regime, remittance inflows could suffer a reduction of between US$3 billion and US$5 billion annually, according to some estimates. This would be a considerable loss, particularly for regions in India that depend heavily on income from abroad to finance household consumption, education, and healthcare.
A multi-pronged strategy
Faced with these challenges, India has responded with a multi-pronged strategy that spans trade diplomacy, domestic industrial policy, and financial innovation. One key element has been the diversification of export markets. The Comprehensive Economic Partnership Agreement signed with the United Arab Emirates in 2022 has begun yielding tangible results, with over 90% of Indian goods now enjoying duty-free access and non-oil exports rising by 14% year-on-year in 2024. India has also accelerated trade talks with the European Union and the United Kingdom, focusing on areas of mutual interest such as pharmaceuticals, automotive components, and textiles. Exploratory discussions are also underway with ASEAN and the Mercosur bloc in South America, aimed at reducing over-reliance on the US market.
Domestically, the government’s Production-Linked Incentive (PLI) schemes are beginning to show results in select sectors. The electronics sector, for instance, saw iPhone exports reach US$ 15 billion in 2024, while capacity in solar module manufacturing grew by 8 GW over the same period. In pharmaceuticals, particularly active pharmaceutical ingredients (APIs), import dependence has declined by an estimated 26%. Yet experts caution that subsidies and incentives alone are insufficient. Logistics costs in India remain high – roughly 14% of GDP, compared to 8% in China – and research and development investment remains low at 0.7% of GDP, limiting India’s ability to scale and sustain competitiveness.
The significance of Vance Visit
Diplomatic engagement between India and the United States has intensified significantly in 2025, most notably marked by the high-profile visit of US Vice President JD Vance to New Delhi in April 2025. This visit, the first by a US vice President in over a decade, came at a strategically important moment, coinciding with a 90-day pause on newly announced US tariffs on Indian goods, thus creating a crucial window for substantive negotiations. During the visit, both countries formally launched exploratory talks for a comprehensive Bilateral Trade and Investment Agreement, and on 22 April 2025, negotiators agreed to the terms of reference for this agreement, establishing negotiation tracks covering goods, services, digital commerce, and intellectual property protections. India committed to reducing tariffs on approximately US$ 23 billion worth of US agricultural imports, while the US pressed for lower duties on key manufactured items and expanded access to American pharmaceuticals and IT services.
The two sides set an ambitious target: to conclude the first phase of negotiations by autumn 2025 and double bilateral trade to US$500 billion by 2030, with a strong emphasis on job creation and broad-based welfare. Defence cooperation was a central pillar of the discussions, with the US reiterating its proposal to sell advanced military platforms, including the F-35 stealth fighter, to India, a move that underscores growing strategic trust and positions India as a key counterweight to China in the Indo-Pacific.
Both governments committed to finalising a new ten-year framework for the US-India Major Defence Partnership in 2025, aiming to deepen collaboration across military domains, joint exercises, and technology transfer, while talks also advanced on co-production of US military equipment in India, reflecting a shift toward greater defence industrial cooperation.
Energy cooperation featured prominently in the bilateral agenda, with the US pledging support for India’s energy diversification through investments in nuclear and clean energy technologies and encouraging increased Indian imports of American energy products such as ethanol and natural gas. Technology and innovation also received a boost, with plans for expanded civil space cooperation, including a NASA-ISRO initiative that will see an Indian astronaut fly to the International Space Station in 2025.
The timing of Mr Vance’s visit, amid a temporary suspension of proposed US tariffs, allowed both sides to address outstanding trade frictions constructively, and there was clear optimism about resolving these disputes and establishing a more equitable and mutually beneficial trading relationship. Mr Vance emphasised the strategic importance of the US-India partnership for regional stability and as a bulwark against hostile powers in the Indo-Pacific, reinforcing the visit’s significance in shaping the future trajectory of bilateral cooperation.
The Service Sector’s agility
Meanwhile, India’s services sector has demonstrated remarkable agility; by 2024, over 80% of services for US clients were delivered remotely, up from 50% before 2023. Indian IT and IT-enabled services firms have rapidly scaled remote delivery models and expanded into new geographies, including fintech in Africa, health tech in Latin America, and business process outsourcing in Eastern Europe. These expansions, each growing by more than 20% in 2024, have created new avenues for export earnings and enhanced the sector’s resilience.
The renewed diplomatic momentum, ambitious trade and defence initiatives, and robust sectoral adaptation signal a new era in US-India relations, with the outcomes of Mr Vance’s visit and the ongoing high-level engagement setting the stage for a stronger, more comprehensive partnership poised to shape the economic and strategic landscape of the twenty-first century.
To safeguard remittance flows, the Reserve Bank of India has encouraged higher interest rates on foreign currency non-resident accounts and relaxed investment norms for non-resident Indians. Fintech-driven solutions have also played a role in reducing the cost of cross-border money transfers. For instance, UPI-linked remittance corridors with countries such as the UAE and Singapore have reduced transaction costs to below 2% substantially lower than the global average of 6.3%.
The Challenges
Nonetheless, many challenges remain.
India’s export infrastructure continues to suffer from inefficiencies. Delays at ports average 3.2 days, more than double the time in Singapore, and only about 65% of Indian exporters comply with US and EU product standards, hampering their ability to scale globally. Moreover, the country’s skill development system still falls short, almost half of Indian engineering graduates are not considered job-ready by international firms, raising concerns about the quality of the talent pipeline, even as opportunities expand.
In conclusion, the developments of 2025 have presented India with both a wake-up call and an opportunity. The country has responded with an impressive degree of agility, from forging new trade partnerships and adapting to digital service models to lobbying for fairer access in the United States. Yet the path to long-term resilience demands deeper structural reform: investment in physical and digital infrastructure, stronger R&D ecosystems, and a more future-ready labour force. As global economic uncertainties persist, India’s ability to move from a tactical response to strategic transformation will be the true test of its economic maturity and preparedness.
Dr Sunil Mani is a Visiting Professor at the Centre for Development Studies, Trivandrum ( Kerala) and Ahmedabad University in Gujarat. The views expressed in the above article are his personal views and not necessarily those of Indian Newslink.
