India looks ready for a deal with the U.S. — but at what cost?

This report is from this week’s CNBC’s “Inside India” newsletter which brings you timely, insightful news and market commentary on the emerging powerhouse and the big businesses behind its meteoric rise. Like what you see? You can subscribe here.

U.S. President Donald Trump has, on several occasions, referred to India as the “tariff king,” but now New Delhi stands ready to abdicate its throne.

Recent reports indicate that India has proposed zero tariffs on imports of steel, auto components and pharmaceuticals from the U.S. on a reciprocal basis up to a certain quantity.

This signals a major shift in the South Asian country’s approach, as it has relied on hefty import duties on goods ranging from agricultural produce to automobile parts, footwear, jewelry and information technology products to safeguard its domestic industry.

Data from the World Trade Organization pegs India’s simple average tariff at 17%, substantially higher than the U.S.’ 3.3%, as of 2023.

Trump’s 26% tariffs announced last month on Indian exports — suspended for now — appear to have pushed the country to rethink its protectionist stance.

India, in fact, is among the countries nearing a trade deal with the U.S. Last week, Trump said that negotiations had been “coming along great … we’ll have a deal with India.”

“The future of India hinges on it bringing down trade barriers and opening itself up to more free trade deals with other countries, especially the U.S,” Malcolm Dorson, senior portfolio manager at Global X ETFs said.

The U.S. is India’s largest trading partner, with bilateral trade hitting $129 billion in 2024. India had a $45.7 billion surplus.

“For India’s economic growth to scale from 6% to 8-9%, it needs foreign investment and to ensure that its goods have a global market,” Shumita Deveshwar chief India economist at TS Lombard said, adding that loosening its protectionist stance and reducing regulatory burden is what will move the needle for India.

Where does a trade deal, especially one with zero tariffs on certain goods, leave India’s ambitions of shoring up its domestic manufacturing?

“India will be careful not to do anything that will harm domestic businesses,” Deveshwar told CNBC’s Inside India.

“Yes, India wants a deal with the U.S. because it is our biggest market in terms of goods and services imports and exports. But, zero tariffs is quite ambitious and I don’t see the government taking such a big step,” she said.

Other experts suggest that even if the deal involves India abolishing tariffs on certain sectors, it won’t be particularly detrimental to all of those industries.

Peeyush Mittal, portfolio manager at Matthews Asia does not see a substantial impact on India’s steel, pharmaceuticals and auto parts sectors.

Exporting steel from the U.S. to India is a “money losing proposition,” given the high transportation costs, Mittal said. “I find it very difficult to believe that, even with zero tariffs, U.S. steel producers would be able to sell in India.”

On the pharmaceuticals front, Mittal notes that the U.S. produces a lot of patented drugs amounting to “hundreds of thousands of dollars,” which only the ultra-wealthy can afford. A vast majority will be priced out from such products, he said, adding that the absence of tariffs on pharmaceutical imports will “not alter the structure of the industry in India.”

With Trump aiming to develop the U.S. healthcare sector, the real challenge would be if the country reduces its imports of Indian drugs, or worst if generic Indian pharma companies operating on fairly thin margins are required to establish manufacturing facilities in the U.S.

Such moves will have “far reaching consequences and will compromise the economic contributions of the pharmaceuticals sector to India’s growth,” Mittal said.

He also does not expect a material impact to India’s auto sector, if the country makes way for more U.S. auto parts or automobiles imports.

Ford and General Motors previously had manufacturing operations in India. However, the appeal for their cars was “little among…