What can India buy more of from the U.S.?

A recent Bernstein note indicates significant untapped potential in U.S.-India trade relations, despite deepening ties over the past two decades; while the U.S. holds over 15% of India's import share in sectors like aircraft and surgical instruments, it lags in high-volume categories such as automobiles and agricultural goods due to India's high tariff structure, averaging 17% compared to 7.5% on India's overall trade basket. Analysts suggest easing trade barriers could unlock substantial growth, particularly as companies diversify supply chains away from China, but India's tariff policies and support schemes remain key impediments to broader U.S. export penetration.

Analysis

The U.S.-India trade relationship, despite strengthening over the past two decades, exhibits substantial untapped potential, according to a recent Bernstein note. While the U.S. exported $1.7 trillion globally in 2024, with $1.6 trillion concentrated in the top 50 product categories, its share of India's $601 billion imports in these same categories was a mere $36 billion, or approximately 6%. This highlights a significant opportunity for expansion. Sectors such as aircraft, fruits, surgical instruments, alcohol, and paper, where the U.S. already commands over 15% of India’s import share, represent low-friction growth avenues and are expected to be key in future trade negotiations. Conversely, U.S. penetration in high-volume Indian import categories like automobiles, auto parts, crude oil, cereals, and agricultural goods remains notably low. A primary impediment is India's high tariff structure, with an average tariff differential of around 17% on these top 50 U.S. export products, more than double the 7.5% average tariff on India's overall trade basket. This protectionism is particularly acute in automobiles and agricultural goods, contrasting with countries like Vietnam and Indonesia which have lower effective tariffs and have attracted more U.S. exports. While India's recent agreement to reduce tariffs on U.K. automobile imports to 10% offers a potential precedent, India's minimum support price system and product-linked incentive schemes present further complexities. Amidst the “China+1” global supply chain realignment, India has an opportunity to attract U.S. firms; however, its $439 billion import share from China in 2024 significantly overshadows India's current standing, which also trails competitors like Mexico and Vietnam in U.S. imports. Nevertheless, India's competitiveness in apparel, pharmaceuticals, and jewelry, along with its growing capabilities in mobile phones and auto parts, position these sectors to potentially benefit from supply chain diversification.

Key Decisions for Investors

• Investors should closely monitor U.S.-India trade negotiations, as any reduction in India's high tariffs, particularly for automobiles and agricultural products, could unlock significant growth for U.S. exporters.
• Consider exposure to U.S. companies in sectors like aircraft, fruits, and surgical instruments where the U.S. already has a strong presence in India, as these are poised for further expansion with favorable trade policies.
• Evaluate Indian companies in sectors such as apparel, pharmaceuticals, jewelry, mobile phones, and auto parts, which may benefit from the 'China+1' supply chain diversification strategy and enhanced trade dynamics.
• Factor in the persistent risks from India's protectionist measures, including high tariffs and domestic support schemes, when assessing the market penetration potential for U.S. firms or the sustainability of certain Indian industries reliant on such support.