From Tariff Cuts To Market Access: The Real Impact Of The New India–US FTA On Indian Businesses

Co-Authored by Saurabh Jain, CFO - Garment Business, Arvind Limited

India–US trade is no longer a peripheral variable for Indian industry. Bilateral goods and services trade reached $212.3 billion in FY2025, growing 8.3% YOY, with goods trade alone accounting for $128.9 billion in FY2024. India continues to run a substantial surplus: approximately $45.8 billion on an April–March fiscal year basis, and closer to $58 billion on a calendar year basis, reflecting different trade accounting periods. The United States now absorbs 17.57% of India's total exports, and that share is projected to rise to 18.2% in 2025. For pharmaceuticals, gems and jewellery, textiles, engineering goods, chemicals and information technology services, the US market anchors pricing power, scale and margin stability.

This is the commercial landscape against which the India–US Bilateral Trade Agreement must be evaluated. The interim framework announced on 2 February 2026, reducing US reciprocal tariffs on Indian goods from 25% to 18%, initially appeared to provide tangible relief to export-oriented sectors. However, the US Supreme Court's ruling on 20 February 2026, which invalidated the use of the International Emergency Economic Powers Act to impose those tariffs, materially altered the operating environment. The United States responded by invoking Section 122 of the Trade Act of 1974 to impose a temporary 10% global tariff, subsequently escalated to 15% and capped at 150 days.

The result is that Indian exporters are navigating an agreement that promises structured liberalization while operating under short-term tariff volatility. This tension is central to understanding the real impact on Indian businesses.

The Pre-FTA Operating Environment: Where Friction Sat

The pre-FTA baseline reveals why this agreement was inevitable and why its consequences are uneven. India's average applied tariff stands at 17%, compared to 3.3% in the United States. In politically sensitive sectors the differential is sharper. Agricultural tariffs average 39%, with dairy attracting rates between 100 and 150%. Auto components face duties of 15 to 30%, textiles between 10 and 25%, and electronics between 10 and 20%.

From Washington's perspective, this asymmetry has long been a source of trade deficit politics. From India's perspective, it has functioned as calibrated industrial protection. The 25% reciprocal tariff imposed in 2025 disrupted that equilibrium and forced a structural renegotiation.

Yet tariffs only tell part of the story. Pharmaceuticals, India's largest export category to the United States at $10.6 billion, operate under intensive oversight by the US Food and Drug Administration, which supervises 262 compliant Indian plants. Compliance costs are recurring and embedded in business models. In services, India exported approximately $41.7 billion to the US in 2024, representing roughly half of bilateral services trade, though a significantly smaller share of NASSCOM's projected $283 billion total industry revenue for 2025. With 71% of H-1B visas issued to Indian nationals in 2024, mobility, data governance and regulatory clarity are as commercially significant as tariff schedules. Indian firms were already deeply integrated into the US economy before this agreement, and the FTA reorganizes that integration.

Tariff Liberalization: Margin Expansion vs. Import Shock

The reduction from 25% to 18%, and the temporary 15% rate currently in place, materially affect landed cost calculations. For exporters in textiles, gems and jewellery, auto components and chemicals, even a 5-7% shift alters competitiveness against suppliers in China and Vietnam. Auto parts exporters are projected to see cost reductions of 10 to 15% with export growth of around 15%, if tariff stability is secured. Gems and jewellery could register volume growth in the range of 20 to 30% from a multi-billion dollar base. These are commercially significant adjustments in sectors that operate on tight margins and large volumes.

However, the agreement is not an export dividend in isolation. India has committed to eliminate or reduce tariffs on US industrial goods and selected agricultural products, including dried distillers' grains, sorghum and nuts. Sensitive categories remain protected, but domestic pricing structures will inevitably adjust at the margins. Even limited liberalisation can produce price transmission effects in adjacent markets, compressing margins for Indian producers who may not be directly displaced but must respond to new reference prices. The FTA therefore redistributes competitive pressure within India. Export-facing sectors gain incremental headroom and import-competing sectors must adjust to narrower buffers.

Rules of Origin and China+1: The Strategic Lever

Rules of origin introduce another layer of strategic consequence. The interim framework contemplates value-addition thresholds of 35 to 45%, with limits on Chinese inputs reportedly around 20%. For electronics and capital goods manufacturers, where Chinese inputs can account for up to 40% of supply chains, preferential access is conditional rather than automatic. Failure to meet origin thresholds negates tariff benefits.

This converts the FTA from a passive advantage into an active compliance requirement. Businesses must reassess sourcing models, vendor diversification strategies and capital allocation decisions. The intersection with India's Production Linked Incentive schemes is particularly significant. Companies balancing subsidy eligibility and origin compliance may confront structural tensions that require supply chain redesign rather than marginal adjustments.

Services and Digital Trade

If goods tariffs are the visible headline, services and digital trade may be the structural story. Services exports have grown at a 12.4% compound annual rate between 2019 and 2024. The framework includes removal of India's digital services tax and contemplates bilateral rules on cross-border data flows. Greater clarity in data localisation and digital governance can reduce compliance costs by an estimated 10 to 15% in relevant segments.

In margin terms, this matters more than incremental goods tariff adjustments. For IT and knowledge economy firms, regulatory certainty directly influences EBITDA performance. At the same time, enhanced cybersecurity, audit and data governance obligations will raise the baseline compliance threshold. Larger firms will absorb these requirements within existing governance structures. Mid-sized firms may find that compliance capability becomes a differentiator in client acquisition and retention.

Pharmaceuticals illustrate the dual character of the agreement. India supplies 47% of US generics demand, and the US accounts for 35% of India's pharma export revenue. Generics remain tariff-exempt under the interim framework, preserving the core commercial model. Yet the risk lies in intellectual property expectations that traditionally accompany US trade agreements. Data exclusivity extensions or patent term adjustments, even if incremental, could delay market entry and materially affect revenue trajectories for first-to-file generics manufacturers. The commercial analysis of this agreement must therefore extend beyond tariff schedules to portfolio-level IP exposure as well.

Compliance Costs: The Invisible Multiplier

Compliance costs form the invisible multiplier. Non-tariff barriers and documentation requirements account for 5 to 15% of export costs in several sectors. While certain non-tariff barriers in medical devices and ICT are addressed in the framework, expanded ESG-linked reporting, certification regimes and customs sophistication requirements will demand sustained investment. MSMEs, which account for 45% of India's exports, may experience disproportionate strain. For them, tariff relief can be partially offset by the cost of meeting enhanced governance standards. The agreement thus widens the performance gap between compliance-ready corporates and capacity-constrained exporters.

India-EU FTA Comparison

The parallel conclusion of the EU–India FTA, eliminating duties on 99.5% of Indian exports by value from a $75.85 billion baseline, adds a diversification dimension. However, the EU framework is anchored in sustainability and carbon border adjustment mechanisms. Indian firms operating in both markets will navigate dual regulatory ecosystems, each with distinct compliance logics. Governance complexity, not tariff arithmetic, becomes the strategic planning challenge.

Structural Adjustment, Not Just Tariff Reduction

The immediate uncertainty created by the US Supreme Court ruling on 20 February underscores a broader lesson. Trade integration now operates within a context of policy volatility. The interim reduction to 18%, the temporary 15% global tariff, and the 150-day statutory cap collectively demonstrate that tariff certainty cannot be assumed. Notably, as of 24 February 2026, US Customs and Border Protection continue to apply the original 25% reciprocal rate in its systems, pending further legal and administrative clarity - a commercially critical detail for exporters managing live shipments. Yet the structural direction remains clear: deeper integration, conditional preferential access, and higher regulatory expectations.

The India–US FTA is therefore best understood as a competitive reallocation mechanism. Export-oriented, compliance-capable sectors stand to benefit from improved market access and supply chain repositioning. Import-competing sectors and firms heavily dependent on Chinese inputs face adjustment pressure. Services may realize the most significant long-term gains, where regulatory clarity translates directly into margin stability.

In this environment, tariff relief is an advantage, but regulatory readiness is strategic capital. The businesses that succeed will not be those that simply benefit from lower duties. They will be those that align supply chains with origin requirements, invest in compliance infrastructure, and treat the agreement as a structural recalibration of how they integrate with the US economy rather than as a transient trade headline.

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