After more than six months of stalled trade negotiations, US President Donald Trump has decided to lower tariffs on Indian goods from 50% to 18%. While the details of the agreement are yet to be laid out, the announcement was predictably met with relief in India and signals better relations between the two countries going forward. It also comes on the heels of a new budget in India, announced on 1 February.
Before the announcement of the deal, however, the long-lasting nature of the tariff negotiations had thrust India into completing a series of free trade deals and reforms aimed at making the country a more attractive investment destination. The budget doubled down on these efforts, with new incentives for manufacturing in strategic sectors such as semiconductors and rare earths. Still, analysts noted that the spending plans showed fiscal restraint following a series of tax cuts last year.
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Shumita Sharma Deveshwar, chief India economist at consultancy TS Lombard, spoke to Investment Monitor about the regulatory changes in India over the past six months, the finalisation of long-standing negotiations over free trade agreements (FTAs) and what investors want to see next.
The interview was conducted before the new trade deal with the US was announced.
Eugenia Perozo (EP): In August 2025, on the heels of US-India tariff tensions, you said that “tweaks are happening, but not fast enough to get investors excited”. Is this budget a continuation of that status quo or does it offer bold enough reforms to spur more foreign direct investment?
Shumita Sharma Deveshwar (SSD): They are bold reforms, but I think the key focus should be on the fact that reform momentum is picking up, and this budget signals that that momentum is staying intact. There is too much focus on the budget, which is essentially an accounting exercise, as a lot of policy measures are announced outside of the budget.
Investors should see that momentum has picked up because of US tariffs. The overdependence on the US market for exports, investments and diplomatic relations – I think all of these things got a bit shaken up when trade talks with the US began to stall and these hefty [50%] tariffs were levied on India. It really forced the government to sit up and think, what do we do to make sure India’s growth stays intact?
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By GlobalDataWe subsequently saw many measures come through, from the Goods and Services Tax (GST) rationalisation, to the final implementation of the Labour codes, which had been stalling for about five years, to other things like lowering non-tariff barriers.
There are a lot of these smaller deregulations aimed at making it easier for people to do business in India, whether it is domestic investors or foreign investors. I think it is a good thing that we have had our back up against the wall and as a result we have been pushed to reform, but at the same time, we haven’t really seen that translate into a pickup in domestic investment.
EP: There was a focus on increasing manufacturing in strategic sectors such as semiconductors, rare earths and data centres through offering various tax reforms. How might foreign investors and companies react to this push?
SSD: India has had a strong tech sector but at the same time, it has actually been missing out on the AI boom. The tax incentives that the government has proposed in the budget are basically aimed at trying to get a foot in the door of this AI gold rush.
In fact, that has been one of the reasons why foreigners have been selling Indian stocks and Indian equity, because there haven’t been really any great AI-driven investment options here in India. This is way of saying, we are open to doing business, including in AI, and we will give these tax incentives.
When they did these earlier budgets, they have done these production-linked incentive schemes. Some of these sectors it worked out really well, for some it didn’t. So it really remains to be seen how this pans out.
EP: How do the budget reforms address the 50% tariff rate imposed by the US?
SSD: A lot of the policy measures started happening once the trade talks with the US stalled, right? So, there has been a move to improve the ease of doing business in India. In terms of some customs reforms, such as GST rationalisation, the budget partly addresses that.
As part of the increased reform momentum, the government has been finalising free FTAs with other countries that had also been in the works but were just waiting to be completed. This move picked up around 2021–22. For ten years before that, we had no bilateral FTAs, and since about July of last year, we have seen several of these come through. So it could be that years of negotiations have finally led to a conclusion at this time – but I also think that there is a push for sure.
The trade deal with the EU that was announced last week is the biggest one of them all. The EU is the second-largest export market for India, after the US. It is all part of trying to open India up and tell investors, both at home and abroad, that, look, we are going to create as much of a supportive policy environment as possible. I mean, that is the headline. Under that, of course, there continues to be a lot of red tape, you know, regulatory reforms that are still needed for businesses to become comfortable doing business here.
EP: Given that there is this momentum for reform, and that all these specific changes consolidate into a bigger picture of a more business-friendly environment, what changes do investors want to see next?
SSD: As far as structural reforms go, there are three main things: infrastructure, land availability and the lack of a skilled workforce. When it comes to doing daily business, I think the key thing is to improve the regulatory environment. Make compliance easier, reduce the burden of compliance and taxes on small businesses, which find it hard to manage this network of rules and regulations.
I think banks have been a little risk averse, so maybe focus a little bit more on that, that I guess is more for the Reserve Bank of India to do. Just figure out, why are banks not lending enough, to businesses especially. Even though these are small things, they count towards a bigger picture. The key thing is just to make it easier for businesses to operate in India by deregulating, and since about last year, policy focus has shifted to that area.
