How India's Foreign Policy Impacts Business and Trade
India's foreign policy choices have direct consequences for businesses operating in India or trading with India — FTA portfolios determine tariff rates; sanctions compliance requirements affect which business partners are permissible; bilateral political relationships shape regulatory treatment of foreign companies; and geopolitical supply chain considerations affect investment decisions in India's manufacturing sector.
The intersection of foreign policy and business is most visible in three areas: India-China relationship dynamics (restricting Chinese FDI while remaining commercially engaged); US-India tariff tensions (US tariffs affecting Indian exports); and India-Russia energy trade (Indian oil purchases creating US secondary tariff exposure for Indian companies' US-market operations).
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| Representational image: How India's Foreign Policy Impacts Business and Trade |
India's absence from
RCEP (the Asia-Pacific's largest trade bloc) and the stalled EU and UK FTAs
represent market access disadvantages; Indian goods face higher tariffs in EU
and UK markets than Chinese or Vietnamese goods under RCEP.
What You Need to Know
- FTA
impact on exporters: India-UAE CEPA (95% of Indian goods zero duty in UAE
by 2030); India-Australia ECTA (goods and services liberalisation);
India-Korea CEPA (bilateral trade grown from $3 billion to $20 billion
since 2010); benefits flow to: textiles, pharmaceuticals, machinery, IT
services; RCEP non-membership creates competitive disadvantage vs ASEAN
peers in their home markets.
- Chinese
FDI restrictions post-Galwan: Parliamentary amendment (Press Note 3, 2020)
requires government approval for FDI from countries sharing land borders
with India (China, Pakistan, Nepal, Bangladesh, Bhutan, Myanmar,
Afghanistan); in practice primarily applied against Chinese investment;
approval process is slow and often denied for strategic sectors; Chinese
tech companies (ByteDance, Xiaomi) face regulatory pressure; Chinese FDI
fell approximately 75% from 2019–2023; Chinese smartphone companies face ED/tax
investigations.
- US
tariffs and Indian business: Trump's 2025 tariffs on Indian goods (26%
reciprocal tariff, paused partially; 25% additional for Russian oil
purchases) affect: Indian textile exports (significant competitive
disadvantage vs Bangladesh, Vietnam in US market); IT services (if
extended to services); pharmaceuticals (India is the primary supplier of
US generic medicines — pharmaceutical exemption has been politically
sensitive).
- India-Russia
oil and secondary tariff risk: Indian companies that purchase Russian oil
face potential exposure to US secondary sanctions; Indian banks that
process payments for Russian oil face SWIFT-related pressure; the US
secondary tariff specifically imposed on India for Russian purchases is a
direct business cost; Indian refinery companies (Reliance, HPCL, BPCL)
manage this through complex payment routing.
- CAATSA
waiver for S-400: India's purchase of Russian S-400 air defence system
triggers US CAATSA (Countering America's Adversaries Through Sanctions
Act) obligations; the US has not formally waived CAATSA for India (unlike
Turkey which was sanctioned); the unresolved CAATSA situation creates
legal uncertainty for US defence companies doing business with India (are
they engaging with an entity that has CAATSA-sanctioned Russian systems?).
How It Works in Practice
1. FTA utilisation and the origin rules challenge:
India's FTAs are underutilised by Indian exporters — utilisation rates of
25–30% are documented; the primary reason is "rules of origin"
complexity: FTAs specify minimum domestic content requirements that Indian
exporters must demonstrate to claim preferential rates; smaller Indian
exporters lack the documentation infrastructure to prove origin; trade
facilitation (simplified origin certification) is a specific India-EU/India-UK
FTA demand by Indian exporters.
2. China decoupling in Indian manufacturing supply
chains: Post-Galwan, India has pursued PLI scheme manufacturing
specifically to reduce Chinese component dependency; Indian mobile phone
assembly (now approximately 98% of India's iPhone production is
India-assembled) reduces Chinese component value-added share; India's solar
panel manufacturing PLI aims to reduce Chinese solar panel import share; the
business case (lower tariffs on India-made goods under PLI; US
"China+1" supply chain demand) and the foreign policy case (reducing
strategic dependency) align for PLI investment.
3. Russian oil business model: Indian refineries
(Reliance's Jamnagar, HPCL's Vizag, BPCL's plants) process Russian Urals crude
imported through complex routing; payment through non-dollar channels (UAE
dirhams, UAE-based trading companies) avoids direct dollar-system exposure; the
business model is profitable at current discount levels; but US secondary
tariffs specifically on India impose costs that erode the discount advantage;
if CAATSA sanctions were applied more broadly to companies doing business with
sanctioned Russian entities, the model would become legally risky for Indian
oil majors with US business.
4. Technology sector and US export controls: The US
Bureau of Industry and Security's export control lists (Entity List) prevent US
technology companies from supplying certain Chinese entities; India benefits
from this (as a "China+1" destination for technology partnerships)
but Indian companies that work with Chinese entities can face secondary
restrictions; India's bilateral technology agreements with the US (iCET)
provide some carve-outs; the global supply chain's political sensitivity
creates compliance complexity for Indian IT and technology companies.
5. India-Canada business impact of diplomatic crisis:
The Nijjar assassination claim (September 2023) and subsequent India-Canada
diplomatic crisis suspended the India-Canada FTA negotiations and created a
chilling effect on India-Canada bilateral investment; Canadian institutional
investors (pension funds — CPPIB, CDPQ — which have significant India
infrastructure investments) continued their India investments despite political
friction; the business relationship is more resilient than the political relationship.
What People Often Misunderstand
- FTAs
produce aggregate trade gains but create winners and losers within India:
India's FTA with UAE benefited Indian exporters of gems and jewellery,
engineering goods, and pharma; it created competitive pressure for Indian
fruit and vegetable farmers (from UAE's trade-transit role for Egyptian
produce); not all sectors benefit from every FTA.
- India's
RCEP non-participation is primarily a business cost, not only diplomatic:
Indian exporters in ASEAN-destination markets face higher tariffs than
Vietnamese or Indonesian competitors under RCEP; the competitive
disadvantage is real and growing as RCEP rules of origin provide
Vietnamese and Chinese manufacturers with market access advantages that
Indian manufacturers lack.
- Chinese
companies in India haven't disappeared — they've changed structure:
Post-Galwan restrictions reduced direct Chinese FDI but Chinese interests
continue through: Singapore-incorporated vehicles (Chinese ultimate
beneficial owners but Singapore intermediaries avoid Press Note 3);
technology licensing (no equity investment required); and continued
component supply (banned only for certain government contracts, not
private sector).
- India's
pharmaceutical exports to the US are partially protected from tariff
pressure: India supplies approximately 45% of US generic drug needs;
the US pharmaceutical industry depends on Indian generics for cost
containment; US hospitals and insurance companies have significant
political interest in maintaining Indian pharma access; the pharma tariff
sensitivity gives India some leverage in broader India-US tariff
negotiations.
- CAATSA's
non-application to India is a deliberate US strategic choice: The US
has chosen not to formally sanction India under CAATSA for the S-400
purchase because the strategic value of the India relationship exceeds the
arms control signal value of sanctioning India; but the waiver has not
been formalised either — the ambiguity preserves US leverage.
What Changes Over Time
India's bilateral investment treaty (BIT) programme — after
terminating many BITs in 2017 after multiple adverse arbitration awards, India
has been negotiating new-model BITs — will determine India's investment
protection regime; concluded BITs with the UK, EU, and UAE-GCC will shape
India's investment environment for foreign investors. The India-EU FTA's
eventual conclusion will be the most significant trade agreement for business
since the India-UAE CEPA.
Sources and Further Reading
- Tribune
India — Sindoor and strategic autonomy: https://www.tribuneindia.com/news/bricsleadership/operation-sindoor-beyond-how-india-asserted-strategic-autonomy-amid-tariffs-security-challenges
- CSIS — India's future strategic choices: https://www.csis.org/analysis/indias-future-strategic-choices-complications-mass
- News India Times — India's foreign policy 2025: https://newsindiatimes.com/turning-strategic-autonomy-into-genuine-influence-a-look-back-at-indias-agile-foreign-policy-in-2025/
- Foreign Policy — India strategic autonomy: https://foreignpolicy.com/2025/11/26/india-end-strategic-autonomy/