Heads, US wins, tails, India loses? | The Daily Brief #405

Summary

In this episode, the focus is on two major topics affecting India's economy. First, the India-US interim trade deal is analyzed, revealing an imbalanced agreement that secures some benefits for India, like avoiding steep tariffs and accessing advanced tech, while leaving the US with a significant trade advantage. The second part explores India's underdeveloped corporate bond market, emphasizing challenges like limited institutional demand and regulatory barriers, with the government pushing for reforms to deepen market participation. The video also covers recent developments, such as highway monetization, Starlink's expansion, and changes in small enterprise financing.

Takeaways

• 😀 India and the US have reached an interim trade deal in February 2026, following a turbulent period marked by high tariffs and trade disruptions.
• 🇮🇳 India's export sectors, especially labor-intensive industries like textiles and gems, faced severe challenges due to a 50% tariff imposed by the US, which led to a drop in trade volumes.
• 💼 The interim trade deal focuses on expanding American exports to India, particularly in sectors like energy, aircraft, defense, and technology, without a reciprocal commitment from the US to buy more Indian goods.
• ⚖️ The deal highlights an uneven power dynamic, with the US leveraging its rich consumer base and India's reliance on technology and energy imports.
• 🛢️ A significant condition in the deal is that if India resumes importing Russian oil, the 25% tariff penalty will be reimposed, highlighting the US's control over India's energy choices.
• 💎 Some Indian exports like cut diamonds, jewelry, silk, and aircraft parts received favorable terms, including zero-duty access, reflecting genuine trade complementarity between India and the US.
• 📉 India's most labor-intensive exports, such as textiles and footwear, still face an 18% tariff in the US, which is seen as a survivable but limiting barrier compared to other competitors like China and Vietnam.
• 💡 The trade deal is also seen as part of the US's broader industrial policy, aimed at bolstering American industries like aerospace, semiconductors, and energy, while expanding the Indian market for US goods.
• 🏛️ India's corporate bond market remains underdeveloped, with only 14-16% of GDP being allocated to corporate bonds, far lower than global standards like South Korea and Malaysia.
• 🏦 The Indian government's push to deepen its corporate bond market is aimed at providing businesses, particularly MSMEs, with more diverse financing options beyond traditional bank loans, but structural challenges like regulatory friction and limited demand persist.

Q & A

What were the key developments in the India-US trade negotiations over the past year?

The India-US trade talks went through significant ups and downs over the past year, including initial diplomatic engagements in February 2025, escalating tariffs in April 2025 due to India's purchase of Russian oil, and a six-month period of tensions. However, by December 2025, India reduced its Russian oil imports, and in February 2026, an interim trade deal was struck. Despite the thaw, the deal appears imbalanced, with the US exerting substantial leverage.

What is the significance of the 25% tariff on Indian goods and the conditions tied to it?

The 25% tariff on Indian goods, which had been imposed in 2025, was removed as part of the interim deal. However, this removal comes with a major condition: if India resumes purchasing Russian oil, the tariff will be reimposed immediately. This energy-related stipulation is unusual in trade deals, highlighting the US's use of economic pressure to influence India’s energy policies.

What are the primary goods India exports to the US, and how does this shape the trade relationship?

India primarily exports labor-intensive and mid-tech goods to the US, such as electronics, gems, jewelry, textiles, apparel, and pharmaceuticals. This creates a trade surplus for India with the US, as India exports more than it imports from the US. However, these goods face higher tariffs, especially in sectors like textiles and footwear, which are vulnerable to competition from other countries like Vietnam and China.

How did India's exporters respond to the 50% tariff imposed by the US?

When the US imposed a 50% tariff on Indian goods, exporters did not reduce prices but instead passed 96% of the tariff costs onto American consumers. Indian firms maintained their margins, but as a result, their export volumes to the US dropped significantly. To counteract this, exporters began redirecting their products to other markets like China and Southeast Asia.

What is the trade imbalance between India and the US in terms of export categories?

India's exports to the US consist mostly of labor-intensive goods, while the US exports capital and technology-intensive goods to India. These include items like aircraft, defense equipment, machinery, and medical devices. The imbalance is evident in the fact that India has a consistent trade surplus with the US, largely because it exports more low-tech goods while importing high-tech products.

How does the India-US trade deal reflect a power dynamic between the two countries?

The India-US trade deal strongly favors the US, with India committing to purchase $500 billion worth of American goods over five years without a reciprocal commitment from the US to increase its purchases of Indian goods. This creates a one-sided market dependence, with India being locked into purchasing more expensive US products without securing expanded access for Indian products in the US market.

Why are India’s labor-intensive sectors like textiles and footwear still facing high tariffs in the deal?

India's most labor-intensive sectors, such as textiles, footwear, and apparel, still face tariffs of 18% because these industries compete directly with countries like Vietnam and China, which already benefit from lower tariffs. While these tariffs are not as high as the previous 50%, they still represent a significant barrier to growth in these sectors, which employ millions of workers in India.

What are the strategic benefits India gains from the trade deal despite the lopsided terms?

Despite the imbalance in the deal, India secures important strategic benefits, such as access to advanced technology, particularly in the fields of semiconductors, GPUs, and data center equipment. These components are vital for India’s growing digital infrastructure and AI ambitions, making the deal beneficial for India’s long-term industrial and technological goals.

How does the India-US interim trade deal impact India's corporate bond market reform efforts?

The India-US trade deal and India’s broader economic policies are part of a broader strategy to secure economic growth and stability, which also ties into India’s efforts to reform its corporate bond market. While the bond market remains underdeveloped, attracting foreign investment through trade deals and ensuring access to essential technologies could create a more favorable environment for corporate bonds to grow.

What are the main challenges that India’s corporate bond market faces?

India's corporate bond market faces several challenges, including regulatory complexity, lack of market-making infrastructure, and limited demand from institutional investors. Most corporate bonds are rated AAA or AA, with very few issuances from mid-rated companies. Additionally, India's government debt competes with corporate bonds for investor attention, driving up yields and limiting the market’s liquidity and depth.