CNBC's Inside India newsletter: India’s three-way balancing act: Tariffs, oil, and uneasy handshakes
News Summary
This article explores India's complex geopolitical balancing act involving the United States, Russia, and China. The U.S. has imposed reciprocal tariffs on India, including an additional 25% penalty tied to India's Russian oil purchases, leading to duties as high as 50% on some Indian exports. This significantly impacts India's largest export market, accounting for nearly a fifth of its total merchandise trade, especially affecting key sectors like diamonds, garments, and seafood. Concurrently, India relies on cheap Russian oil to manage domestic inflation and energy needs, with Russian crude now comprising over 35% of its imports, saving Delhi over $17 billion since early 2022. Russia also remains a vital security partner for India. Despite strained relations due to border clashes, Indian Prime Minister Modi is set to visit China for the SCO summit, signaling India's willingness to maintain open communication channels. This “strategic autonomy” approach, while historically effective, faces unprecedented pressure amidst U.S. tariffs, Russia's energy supply, and China's role as an unavoidable trade partner. Indian markets reacted negatively to the new tariffs, with stocks falling, indicating investor concern over this geopolitical uncertainty. Former RBI Governor Raghuram Rajan has urged India to reassess its reliance on Russian oil in light of the U.S. tariffs.
Background
India is the world's third-largest oil consumer, burning over 5 million barrels per day, making cheap energy a necessity for its economy. Since early 2022, Russia has become one of India's largest oil suppliers, accounting for over 35% of its crude imports. Concurrently, the U.S. is India's single largest export market, worth about $87 billion annually and nearly a fifth of its total merchandise trade. The two countries have deepened strategic ties in areas such as defense cooperation, the Quad, and semiconductor supply chain talks. However, India's relationship with China has been strained by border clashes in 2020, leading to a freeze in high-level engagement, a ban on hundreds of Chinese apps, and tighter foreign investment rules in India. Despite this, trade between the two countries still hit $118 billion last year, with India importing significantly more than it exports. India attempts to navigate these complex relationships through its foreign policy of "strategic autonomy," aimed at safeguarding its national interests.
In-Depth AI Insights
Beyond targeting Russian oil purchases, does the Trump administration's tariff strategy against India harbor deeper geoeconomic objectives? Yes, in addition to penalizing India for buying Russian oil, the Trump administration's tariff strategy likely aims to: - Strategic Supply Chain Reshaping: Through economic pressure, encourage India to align more closely with the U.S. in certain critical sectors (e.g., manufacturing, rare earths), reducing reliance on China and other non-allied nations. This aligns with the U.S.'s long-term strategy of global supply chain "friend-shoring." - Testing India's "Strategic Autonomy" Limits: The U.S. may seek to use economic leverage to compel India into making clearer choices between the U.S. and Russia/China, thereby weakening its long-standing non-alignment policy and encouraging a more synergistic role in the Indo-Pacific strategy. - Expanding U.S. Market Share in India: High tariffs could compel India to turn towards U.S. products and technologies, particularly in its key consumer goods and tech sectors, further cementing India's status as a U.S. economic partner. Can India's "strategic autonomy" policy be sustained long-term, and will it continue to attract foreign investment amidst escalating U.S. economic pressure? India's ability to maintain "strategic autonomy" is under severe test, but it is not impossible, and its potential to attract investment hinges on several key factors: - Domestic Economic Resilience and Reforms: India's capacity to offset external pressures through sustained economic reforms, infrastructure development, and domestic demand stimulation will determine its attractiveness as a global manufacturing hub. - Diversified International Partnerships: India will continue to seek deeper trade and investment ties with non-U.S. allies (e.g., EU, Japan, ASEAN) to reduce over-reliance on a single market, thereby diversifying risks. - Enhanced Geostrategic Value: India's strategic importance as a major Global South power and a critical player in the Indo-Pacific region may grant it leverage in the delicate balance between the U.S., China, and Russia, ensuring it is not fully isolated by any single party. What does Modi's visit to China signify for India-China relations and the broader Asian geopolitical landscape? Modi's visit to China represents a complex signal with multiple potential implications: - Return to Pragmatism: Despite border conflicts and trade deficits, India recognizes the necessity of maintaining communication with China, especially amid global economic uncertainties, reflecting a pragmatic aspect of their relationship. - Attempt at Regional Stability: The meeting between Modi and Xi, with Russian President Putin present, might aim to project an image of major Asian powers capable of resolving differences through dialogue, contributing to regional stability, even if substantive breakthroughs are limited. - Signaling to the U.S.: This visit could also be interpreted as India signaling to the U.S. that it will not fully align with any single bloc and will continue to engage with all major powers based on its national interests, potentially prompting more cautious U.S. policy towards India.