In a major realignment of global energy and trade, India and the United States finalised a comprehensive trade and energy agreement on February 2, 2026. This deal, announced following a high-level conversation between US President Donald Trump and Indian Prime Minister Narendra Modi, brings an end to months of heightened trade tensions and punitive tariffs. The core rationale of this deal is to trade India’s commitment to halt, or significantly reduce, its purchases of Russian crude oil—a major source of tension—for relief from steep US tariffs on Indian goods. This agreement marks a critical shift in India’s foreign policy, aiming to strengthen strategic ties with the US while managing the economic implications of moving away from discounted energy sources.
Rationale of the Trade Deal: The
"Oil-for-Tariff" Exchange
The primary driver behind this deal is the intense
diplomatic pressure from the Trump administration regarding India's import of
Russian crude oil, which had served as a vital, cheaper alternative for India
since 2022.
Tariff Relief: In 2025, the US had imposed punitive
tariffs, pushing the total duty on Indian exports to nearly 50% (combining a
25% "reciprocal" tariff and a 25% "penalty" for Russian oil
purchases). The 2026 deal slashes these tariffs on Indian goods to 18%,
providing massive relief to Indian manufacturers, particularly in sectors like
textiles, gems and jewellery, and pharmaceuticals.
The Russian Oil Constraint: The US has linked this
tariff rollback directly to India’s commitment to cease or severely curtail its
purchase of Russian oil. While Russia was a top supplier (peaking at ~40% of
India's imports in 2025), the US aims to shrink Russia's war chest.
Strategic Pivot: As part of the deal, India has agreed
to significantly increase imports of American energy products, including oil
and liquified natural gas (LNG), and potentially explore other suppliers like
Venezuela.
Impact on India’s Oil Imports
The shift away from Russian oil will significantly
alter India’s energy import basket.
The Transition from Russia: Russian oil, which was
often purchased at a discount (sometimes up to $10-$20 less than Brent), helped
keep domestic fuel prices stable. The 2026 agreement implies a sharp reduction,
or "winding down," of these imports, which had remained high at
around 1.1 million barrels per day (bpd) in early 2026.
Increase in US/Other Imports: India is expected to
shift to alternative suppliers, primarily the United States, whose imports to
India had already risen by over 92% (April-November 2025) even before the deal.
India has also committed to purchasing approximately 2.2 million tonnes of LPG
from the US in 2026.
The "Buy American" Commitment: India has
pledged to purchase over $500 billion worth of US goods, including energy and agricultural
products, over the coming years.
Economic Impact on India: Domestic Oil Prices and
Gains
The deal brings both immediate gains and potential
long-term risks.
Impact on Domestic Oil Prices: Replacing discounted
Russian crude with US or Middle Eastern crude might increase India's annual oil
import bill by roughly 5-10% ($9–11 billion). This higher cost could exert
pressure on domestic fuel prices if global prices rise. However, the reduction
of import tariffs to 18% offers significant cost savings that might balance out
the increased energy import costs.
Gains in Trade and Economy: The primary gain is the
18% tariff, which makes Indian goods more competitive in the US, India’s
largest market (21% of total exports). The deal is expected to boost India's
GDP by improving the competitiveness of labor-intensive industries.
Stabilising the Rupee: The removal of trade
uncertainty and the reduction in punitive tariffs are likely to stabilize the
Indian Rupee and encourage foreign institutional investor (FII) inflows, which
saw outflows in 2025.
Historical Comparison
2022-2025 (The Russian Discount Era): Russia was a
negligible supplier before 2022. Following the Ukraine conflict, Russia became
a top supplier, often providing crude at significant discounts, shielding India
from high global prices.
2026 (The US Partnership Era): The 2026 deal mimics
the 2019-2020 era of high-pressure negotiations but results in a deeper, more
structured partnership. It moves India from a "beneficiary of Russian,
discounted oil" towards "secure energy supply from the Western
hemisphere".
The 2026 India-US trade deal is a strategic compromise that favors long-term, stable trade relations over short-term energy cost savings. While the abandonment of discounted Russian oil poses a risk of rising import bills and potential inflationary pressure on domestic fuel prices, the significant reduction of US tariffs to 18% is a major win for Indian exporters. The deal ensures that India remains a favoured, high-growth partner for the US, positioning it to benefit from shifting global supply chains, while simultaneously securing its energy needs through diversified, though potentially more expensive, sources. The success of the deal will depend on the final implementation of the "Buy American" commitments and the ability of the Indian economy to navigate the transition away from Russian oil.
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