India-US trade deal: India and the US have agreed on an interim agreement framework for a mutual and beneficial trade. This is being considered an important step towards a comprehensive US-India bilateral trade agreement (BTA). After the trade deal was announced on February 3, Indian markets were waiting for the finer details of the agreement which have been as expected. America has also removed the additional 25 percent tariff imposed on Indian goods for purchasing oil from Russia. Additionally, the overall tariff has been reduced to 18 per cent.
Investors have largely tempered their expectations of tariff relief. Barclays believes markets may have digested the positive impact of the bilateral trade agreement earlier than expected. This big tariff cut has taken the pressure off the equity market which is now acting as a solid support.
This agreement, coupled with the recent free trade agreements with the EU, UK, UAE and Australia, further improves the growth prospects of the Indian economy. US tariff reductions, continued policy support for export-oriented and labour-intensive sectors, as well as the expanding FTA network are expected to support export growth in the medium term. This will also help in attracting foreign portfolio investment and bringing stability in the currency. However, this positive effect has diminished somewhat due to the 5.4 percent decline of the rupee against the US dollar in the last one year.
Sectors focusing on exports will benefit more
Sectors focusing on exports will benefit more from this deal. Nomura says reducing US tariffs to about 18 percent would ease pressure on labour-intensive export segments. The brokerage does not expect any change in policy after the tariff reduction. He says that Indian exporters are now at par with their competitors in South East Asia. Due to this, the trade of products like toys and furniture which was earlier going to countries like Vietnam, is now likely to come back to India.
There will be positive impact on market sentiment
This deal may not provide any immediate trigger to the equity market but it will have a positive impact on the market sentiment. Experts say that this trade deal can give a good sentiment boost to the equity market. However, a sustained and large-scale market recovery will also require earnings improvement.
Analysts also believe that it was difficult for India to open up politically sensitive sectors like agriculture, which have been protected till now. Nomura says that despite large tariff concessions, India has been successful in protecting these sensitive markets.
Market experts have warned that any kind of liberalization in the agriculture sector can have negative impacts in the country. Ankita Pathak, head of global investments at Ionic Asset, said, “Opening up agriculture to higher imports at very low or zero tariffs could have a negative impact on farmers’ incomes. The outcome of this deal will depend on execution and stability in future trade terms.”
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