Why in the News?

India and the US agreed on an Interim Trade Agreement (ITA) framework aimed at reciprocal tariff rationalisation and preferential market access. This ITA framework will serve as a precursor to a comprehensive Bilateral Trade Agreement (BTA).This marks a departure from earlier phases marked by tariff escalations, export control measures, and digital trade disagreements.

The US reduced tariffs on Indian goods from 50% to 18%. India committed to eliminate or reduce tariffs on all US industrial goods and multiple agricultural products. For the first time, India secured expanded access to advanced GPUs without export restrictions similar to those imposed on China earlier.

What Does the Interim Trade Framework Contain?

1. Interim Agreement Framework: Establishes reciprocal and mutually beneficial trade structure pending full BTA finalisation.
2. Tariff Rationalisation: US applies 18% reciprocal tariff on many Indian goods including textiles, leather, footwear, plastics, chemicals and machinery.
3. Industrial Tariff Reduction by India: Eliminates or reduces tariffs on all US industrial goods.
4. Agricultural Access: Reduces tariffs on US products such as dried distillers’ grains, red sorghum, tree nuts, fresh and processed fruits, soybean oil, wine and spirits.
5. Energy Procurement Shift: India agrees to halt or significantly reduce the purchase of Russian crude oil and pivot energy procurement toward the US and other sources, a major diplomatic concession tied to tariff reduction.
6. Non-Tariff Barrier Resolution: Addresses import licensing delays and standards issues affecting US medical devices, ICT goods and agricultural products within six months.
7. Rules of Origin Clause: Ensures trade benefits accrue primarily to Indian and US producers.

How Does the Deal Restructure Tariff Architecture?

1. US Tariff Reduction: Reduces tariff from 50% to 18% on several Indian goods.
2. Removal of Tariffs on Indian Exports: Eliminates tariffs on generic pharmaceuticals, gems, diamonds, aircraft and aircraft parts.
3. National Security Tariff Relief: Lifts tariffs imposed under US national security laws on aircraft components.
4. Auto Parts Quota: Provides India preferential quota for auto parts at lower tariff rates.
5. Pharmaceutical Negotiations: Provides “negotiated outcomes” subject to separate US tariff investigation into generic drugs.

What Is a Graphics Processing Unit (GPU) and Why Is It Central to the Deal?

Graphics Processing Unit (GPU): A specialised electronic processor designed to perform parallel computations at high speed. Originally developed for rendering graphics, GPUs are now essential for Artificial Intelligence (AI), machine learning models, data analytics, and large-scale computing operations.

1. AI Compute Infrastructure: AI models require massive parallel processing; GPUs enable this computational capability.
2. IndiaAI Mission Context: IndiaAI Mission has total outlay of Rs 10,370 crore; allocation reduced from Rs 2,000 crore to Rs 1,000 crore in 2026-27.
3. Installed GPU Capacity: Around 40,000 GPUs installed; considered insufficient compared to leading US AI firms.
4. Export Control Contrast: Previous US administration imposed export restrictions; India now escapes restrictions similar to those imposed on China.

How Does the Agreement Transform Data Centre Infrastructure?

1. Tax Holiday Until 2047: Provides income tax exemption for foreign companies establishing data centres in India.
2. US Negotiation Demand: Addresses US demands for tax breaks, affordable land, energy, water, and duty exemptions.
3. Major Investments Announced:
   1. Google: $15 billion investment for 1GW data centre (with Adani Group).
   2. Microsoft: $17.5 billion investment focused on AI data centres.
   3. Amazon: $35 billion investment over five years.
4. Projected Investment Potential: Government estimates up to $200 billion in data centre investments.
5. Market Size: Current valuation $10 billion; revenue $1.2 billion in FY24.
6. Capacity Expansion: 795 MW additional capacity by 2027; total projected capacity 1.8 GW.

What Are the Implications for Electronics Manufacturing and Exports?

1. Electronics Exports: Rs 3.27 lakh crore (~$38 billion) in 2024-25; US largest export destination.
2. Employment: More than two million direct jobs across Tamil Nadu, Karnataka, Uttar Pradesh and Maharashtra.
3. Bilateral Trade Potential: Industry projects electronics trade could reach $100 billion.
4. Production-Linked Incentive (PLI) Scheme: Strengthens smartphone manufacturing ecosystem.
5. Apple Supply Chain: India accounts for nearly one-fourth of global iPhone production, after China.
6. Tariff Stability: Reduces uncertainty after previous 25% tariff threat on India-made iPhones.

How Does the Deal Reflect Strategic Realignment?

1. Energy Procurement Commitment: India to purchase $500 billion worth of US goods over five years including energy, aircraft, precious metals, technology products and coking coal.
2. Supply Chain Cooperation: Addresses non-market practices of third countries.
3. Digital Trade Rules: Commits to remove digital trade barriers and create structured digital governance framework.
4. China Factor: Gains momentum amid global supply chain diversification and strategic competition.

Significance for India

1. Export Competitiveness: Improves price advantage of Indian goods in the US market by lowering tariff barriers.
2. Electronics and Manufacturing Boost: Strengthens Production-Linked Incentive (PLI)-driven exports, especially smartphones and components.
3. Technology Access: Facilitates smoother access to advanced technologies including Graphics Processing Units (GPUs) critical for Artificial Intelligence (AI).
4. Supply Chain Integration: Positions India as a trusted alternative manufacturing hub amid global diversification away from China.
5. Strategic Leverage: Deepens economic alignment with the US, strengthening India’s Indo-Pacific positioning.

Significance for the United States (US)

1. Expanded Market Access: Secures reduced tariffs on US industrial and agricultural exports to India.
2. Energy Export Growth: Enhances US crude oil and energy product exports to India.
3. Technology Export Expansion: Increases demand for US-made GPUs and data centre infrastructure equipment.
4. Supply Chain Diversification: Strengthens alternative production base outside China through India.
5. Geostrategic Consolidation: Reinforces India as a key economic and strategic partner in US global strategy.

Conclusion

The India-United States Interim Trade Agreement (ITA) marks a shift from tariff disputes to structured economic alignment. By combining tariff rationalization, technology access including Graphics Processing Units (GPUs), data centre investments, and energy cooperation, it integrates trade with strategic objectives. Its long-term impact will depend on effective implementation and progress toward a comprehensive Bilateral Trade Agreement (BTA).

PYQ Relevance

[UPSC 2019] ‘What introduces friction into the ties between India and the United States is that Washington is still unable to find for India a position in its global strategy, which would satisfy India’s National self-esteem and ambitions’. Explain with suitable examples. 

Linkage: This PYQ tests India-US bilateral relations focusing on strategic autonomy, power asymmetry, and friction arising from alignment expectations. The Interim Trade Agreement (ITA) reduces structural friction through tariff rationalization, technology access, and energy realignment, signalling greater strategic accommodation.

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