India treads a diplomatic tightrope
India must tread carefully as it navigates a balance between geopolitical relations with the US and China, which has been soured by its entanglements with Russia.
The Indian economy has proven its might this 2025, blazing ahead of its peers to notch an average growth of 7.8 per cent between January to September. Industry and services recorded rapid expansions, while consumption had been supported by low inflation.
One area that could potentially drag growth this fourth quarter is merchandise exports, with the US imposing a hefty 50 per cent tariff on Indian goods. Despite highly favourable domestic conditions, this is a pressing concern that has fallen on Prime Minister Narendra Modi’s plate – one that is more complicated than it sounds.
At the heart of India’s conundrum is diplomacy, with the South Asian nation forced to recalibrate its ties with the US, Russia, and even China as it seeks to maintain its rapid growth momentum.
Unbothered by tariffs
President Donald Trump imposed the highest duty on Indian goods being sold in the US beginning August after Modi refused to heed his call to stop buying Russian oil. For Trump, the continued oil purchases were equivalent to India bankrolling Russia’s attacks on Ukraine, on top of his economic whim to erase the US’ trade deficits with partners.
Modi shocked many, including Trump, when he insisted that the Indian government will accept the sky-high tariffs as it is, calling it the heavy price to pay to keep domestic prices low and stable. Russia is India’s biggest source of crude oil that powers up households and businesses for over 1.4 billion people. As if to rub salt into the wound, the Indian leader received Russian President Vladimir Putin for a state visit in Delhi in December, even hugging and sharing a ride, to show off their strong partnership.
The 50 per cent duty on Indian exports remain in place as of this writing, although negotiating teams have been trying to pull the rate down. Still, Graph 1 shows that the 50 per cent tariff did little to erase India’s gaping trade surplus with the US. India’s exports to the US far outweighed the volume of American goods it bought – consistent with the historical trend – to log the biggest trade surplus among all its trade partners. This surplus was nearly halved in September compared to August, but it is largely because of greater purchases of US merchandise entering Indian borders. In contrast, trade with Russia remained broadly steady between August to October – a clear message of India’s defiance.
Talks have progressed positively in November after India bought military armament and committed to boost purchases of liquefied petroleum gas from the US. However, a trade agreement has remained elusive as New Delhi keeps rejecting Washington’s push for the entry of more US dairy and crop products in India. A no-deal scenario is plausible until early 2026, with India in no rush to cave to the US’ demands.
What Trump’s rhetoric managed to upset was market sentiment towards Indian assets, particularly towards equities. As seen in Graph 2, the BSE Sensex has underperformed this year compared to peers, rising by 4.8 per cent year-to-date to log its slowest pace since 2022. The MSCI India index rose by 21.3 per cent in 2023 and by another 12.4 per cent in 2024. Likewise, the 11-month performance fell behind the average growth in stock valuations across emerging markets at 30.4 per cent and dwarfed by the 33 per cent ascent of Chinese equities as well as by the 52 per cent climb of Brazilian shares over the same period.
The lacklustre performance of Indian stocks in 2025 was a surprise considering how vibrant the market has been for initial public listings, with 97 companies having debuted on the BSE Sensex main board, and another 136 going public through the small cap index.
Despite the alignment of positive domestic conditions, India also lost out in the artificial intelligence space, which had been the key driver that propelled other major indices for most of the year. Unlike the US’ ChatGPT and China’s DeepSeek, India has not yet developed its own AI-powered large language model to compete with highly successful global counterparts.
New strategies
We previously said that India emerged as a quiet winner in the China-centric trade war waged by the US. We maintain this view even in the face of hefty tariffs, with India quick to pivot and realign its growth strategies for its own survival.
Modi also recently reopened warmer ties with Beijing, setting aside conflicting territorial claims along the Himalayan border to forge an alliance with the world’s second-largest economy. The Indian leader attended the Shanghai Cooperation Organization summit just days after the US’ mega tariffs took effect and agreed to resume direct flights to deepen the economic cooperation between the two nations.
India continues to position itself as the alternative location for global businesses diversifying their operations out of China. We see this trend sustained, supported by an abundant labour force and robust industrial activity. The Purchasing Managers’ Index readings for both the manufacturing and services sectors showing that Indian firms remain well into expansion mode despite tariff disruptions – while their Chinese counterparts face the opposite fate – which bodes well for faster expansion. As investors search for growth centres outside the US and developed markets, we find India a bright spot that can provide undervalued yet rapidly growing assets able to offer solid returns. The government’s tricky foreign policy strategy, if done correctly, could support expansion across a broader base.
