India–U.S. Trade Talks: Why India Must Be ‘Very Careful and Clever’ – A Deep Dive

By Suryavanshi IAS | July 18, 2025 | GS Paper 2 & 3

🧭 Background Context

India and the U.S. are currently negotiating a Bilateral Trade Agreement (BTA) to strengthen economic ties. In this context, Dr. Raghuram Rajan, former RBI Governor and renowned economist, has urged India to proceed with caution, especially in sensitive areas like agriculture and dairy, which directly affect millions of livelihoods.

These sectors are highly protected and heavily subsidized in developed countries like the U.S., making Indian farmers vulnerable if markets are opened up uncritically.

🧠 Why Dr. Rajan’s Statement Matters

Dr. Rajan’s experience as an IMF Chief Economist, RBI Governor, and now as a Finance Professor at the University of Chicago, makes his opinion crucial. His warning signals three things:

Agriculture and Dairy Sector Liberalization could hurt Indian farmers
India should leverage trade negotiations to boost domestic value addition
Global trade shifts (U.S.-China tensions) offer India a long-term opportunity

🔍 Key Issues in Detail

1. 🌾 Agriculture: A Sensitive and Subsidized Battlefield

➤ Problem:

Developed countries like the U.S. heavily subsidize their farmers.
- For example, U.S. farm subsidies amounted to over $50 billion in 2023.
Indian farmers are small-scale and receive limited support.
- Over 85% of Indian farmers are small and marginal (owning <2 hectares).
Opening markets to subsidized imports could collapse local prices, leading to agrarian distress.

➤ Rajan’s View:

“Unconstrained flow of agricultural products into the country may create problems for our small producers.”

➤ GS Linkage:

GS 3: Agriculture, MSP Policy, Subsidy Reforms
GS 2: WTO negotiations, Subsidy disciplines

2. 🥛 Dairy Sector: Political Hotspot

➤ Problem:

U.S. demands market access for dairy products (like milk powder, cheese).
India’s dairy sector is cooperative-driven, serving small farmers and women (e.g., Amul).
Allowing U.S. dairy imports could destroy the domestic ecosystem.

➤ India’s Stance:

India has never granted dairy tariff concessions in any Free Trade Agreement, including:
- RCEP (India exited partially due to dairy concerns).
- India-UAE CEPA and India-Australia ECTA both excluded dairy.

➤ Rajan’s Suggestion:

“Instead of importing milk, can we encourage FDI in milk-processing to boost value-added exports?”

➤ Policy Option:

Allow foreign investment in cold chains, cheese, milk powder, etc.
Do NOT liberalize dairy imports.

➤ GS Linkage:

GS 3: Food Processing, Inclusive Growth
GS 2: Bilateral Agreements, FDI Policy

3. ⚙️ India as an Alternative to China in Manufacturing

➤ Global Context:

The U.S. has imposed high tariffs on China and some Southeast Asian countries.
India is negotiating to reduce U.S. tariffs on Indian exports (steel, aluminum, automobiles).

➤ Opportunity:

If U.S. tariffs on India remain lower than China, India becomes a preferred destination.
Potential to attract supply chain relocations, especially in:
- Electronics
- Auto components
- Defense manufacturing

➤ Rajan’s Observation:

“This global trade realignment may benefit India in the longer term.”

➤ GS Linkage:

GS 3: Industrial Policy, Make in India, Export Promotion
GS 2: India-U.S. Relations

4. 🛡️ India’s Tariff Strategy – Protectionism or Pragmatism?

➤ Current Trends:

India has increased tariffs in recent years to protect local industries.
Example: 50% tariffs on steel/aluminum, 25% on cars, 60% on toys.

➤ Rajan’s Advice:

“Certain protectionism is fine, but opening up to competition in key areas like car manufacturing may boost competitiveness.”

➤ Policy Balance Needed:

Maintain strategic tariffs in vulnerable sectors (agriculture, dairy).
Reduce tariffs in competitive sectors to enhance export potential and global integration.

➤ GS Linkage:

GS 3: Trade Policy, MSME competitiveness, WTO Rules
GS 2: Development vs. Protectionism debate

📊 Summary Chart: Sticky Notes Style Revision

Theme	Key Insight	Policy Direction
Agriculture	Indian farmers vulnerable to subsidized imports	Do not liberalize without safeguards
Dairy	Politically and economically sensitive	Encourage FDI, not import access
Trade Diversion	India can benefit from U.S.-China tension	Build export capacity in manufacturing
Tariff Strategy	Balance protectionism and openness	Strategic tariffs only in key sectors

🔗 GS Paper Linkages

GS Paper	Relevant Topics
GS Paper 2	Bilateral trade agreements, India–U.S. relations, WTO negotiations
GS Paper 3	Agriculture subsidies, Food processing, Protectionism vs. liberalization, Export strategies

🧾 Mains Practice Questions

Q. Critically analyze the implications of liberalizing India's agriculture and dairy sectors under bilateral trade agreements with developed countries. (250 words)
Q. "Trade tensions can be a disguised opportunity for India." Evaluate this statement in the context of India–U.S. economic relations. (150 words)

रघुराम राजन का कहना है कि भारत को संयुक्त राज्य अमेरिका के साथ व्यापार समझौतों में अत्यंत चतुराई और सतर्कता से काम लेना चाहिए, खासकर कृषि और दुग्ध उत्पादों के मामले में।

प्रमुख चिंताएं:

अमेरिका जैसे देशों के भारी सब्सिडी वाले उत्पादों से भारतीय किसान खतरे में पड़ सकते हैं।
भारत ने अब तक किसी भी समझौते में डेयरी उत्पादों पर शुल्क छूट नहीं दी है।
भारत को दूध आयात की बजाय वैल्यू एडिशन (पनीर, मिल्क पाउडर) पर जोर देना चाहिए।
चीन पर लगे अमेरिकी शुल्कों के चलते, भारत के लिए मैन्युफैक्चरिंग का बड़ा अवसर बन सकता है।

नीति सुझाव:

कृषि और डेयरी में कोई शुल्क छूट न दें।
एफडीआई को डेयरी प्रोसेसिंग में प्रोत्साहित करें।
कई क्षेत्रों में प्रतिस्पर्धा बढ़ाने के लिए आयात शुल्क में कमी की जा सकती है।

Suryavanshi IAS

Friday, July 18, 2025