India’s Trade Pacts With EU, UK And US Set To Reshape Export Landscape And Economic Growth

2025 was a tough year for all countries which were harangued by the imposition of high tariffs by the USA. India had a tougher time, given that there was an additional 25% tariff levied for importing Russian oil. 2026 has started off on a pleasant note, with India inking a pact with the EU in January and agreeing to certain terms when it comes to dealing with the USA in February.

The result is that the tariff now on India stands at 18%. This is definitely good news for exporters, who were at a disadvantage when it came to exporting to the USA, which is the largest market for India.

US tariff shift and economic impact

The winner in what could be called theatre of the absurd was the US. From an average tariff of 3% or so, which was imposed on imports, the US will get a minimum of 10% now, which goes up depending on the country involved. Therefore, in terms of tax collections, there should logically be a big push. This is what the president did talk of when he spoke of making sure that Americans don’t pay for other countries’ upliftment.

Two fears which were touted last year on account of higher tariffs were inflation and recession. Neither of them has been observed in the US, and it looks like the rules of economics have been rewritten.

Logically, higher tariffs should mean that prices of goods should go up in the US. Similarly, higher inflation should militate against growth. But both have held well, leading the Fed to lower interest rates. Growth, too, seems to be doing well under benign unemployment conditions.

Shift from WTO framework to bilateral deals

From the point of view of the world economy, the major unintended consequence has been that all countries have been following what the WTO wanted but never achieved. Freer trade with lower duties was never acceptable for nations, which led to the institution becoming less relevant.

Now countries have been following different kinds of MFN agreements with others, leading to the achievement of freer trade between countries. The only difference is that the USA has ensured that all policies have America as the fulcrum.

India’s export advantage

The achievement for India is that we have signed agreements with the US, the EU and the UK, which, taken together, account for almost 50% of our exports. Hence, things cannot be better from the standpoint of striking deals with countries, and, hence, the government needs to be complimented.

While there are other deals signed with countries like the UAE, Oman, Australia, New Zealand, etc., their share in overall exports would be low. However, seen in its entirety, this can cumulate to a fairly higher number, which will help growth in alternative markets for Indian products. There would be two major adjustments that have to be made in the course of time, which can be a year or two before all these agreements work fully.

Need for export competitiveness and modernisation

The first is on the exports side. There is a need to get into the act together to ensure that exporters get more competitive and are able to provide the best possible quality at lower prices. While the duty imposed by the US is favourable for India relative to other countries, there will be a lot of catching up to do.

This holds especially for industries like textiles and readymade garments, jewellery, leather products, engineering and chemicals, among others. Modernisation and quality would be the two driving factors, and the units need to be prepared to make the necessary investments in capital and labour.

These industries tend to be labour-intensive, and, hence, skilling of the workforce becomes important. Competing firms in countries like Vietnam, Bangladesh, Sri Lanka and Indonesia, among others, would get more aggressive in the US market and push for their goods.

As exporters tend to be in the MSME segment, there would be a need to get more professional to ensure that the best practices are followed. The government has already changed the definition of MSMEs, which allows them to expand meaningfully.

In the past, several smaller units did not want to expand, as there was the fear of being left out of the benefits bestowed on them once the size limits were surpassed. This barrier has been removed, and the MSMEs need to leverage the same as well.

Here, there would be interventions required whereby the MSME exporters are guided to explore new markets and be abreast of the changes taking place in the manufacturing world, i.e., other countries, so that they can fine-tune their operations.

Here, the Chambers of Commerce can take the initiative by getting them involved in study tours to other countries, which would also involve participating in exhibitions so as to showcase their products. This has to be taken up with urgency.

Domestic industry and import competition

The other fallout is in the realm of how domestic industry would be affected on account of these trade treaties. All trade agreements not only involve getting access to markets for domestic products but also giving space to imports into the country. The trade agreements signed have spoken of specific products that would be entering the country at lower or zero duty.

This is something which individual industries need to examine, as this would also mean that there would be more competition from imports. This can range from the farm sector to high-level technology. Therefore, industries will have to evaluate the prospects of more competition coming in from imports.

Hence, the next couple of years will require a lot of hard work to be put in by exporters to ensure that they are able to leverage the trade deals that have been forged with the major export markets. Domestic firms, on their part, have to introspect and formulate strategies on how to adjust to the new environment, which has fewer impediments for imports.

The author is Chief Economist, Bank of Baroda and author of ‘Corporate Quirks: The Darker Side of the Sun’. Views are personal.

Published on: Monday, February 16, 2026, 08:27 PM IST