What Happened
- Following the US Supreme Court striking down IEEPA-based tariffs on February 20, 2026, and the US government subsequently issuing a new executive order under Section 122 of the Trade Act of 1974, Indian goods will face a 15% reciprocal import levy from February 24, 2026.
- Trade experts and exporters noted this is a net improvement: the earlier IEEPA-based reciprocal duty on India was 25%, reduced to 18% under the interim bilateral trade framework; the new flat 15% Section 122 surcharge is lower than both prior rates.
- Indian exporters in key sectors — pharmaceuticals, textiles, engineering goods, gems and jewellery — are recalibrating their cost structures and pricing strategies.
- The India-US Bilateral Trade Agreement negotiations continue; Phase 1 targeting early tariff concessions is expected to be signed in March and take effect from April 2026.
- The new 10% global tariff order was initially announced, then quickly raised to 15%, adding to uncertainty for trade planning.
Static Topic Bridges
India's Export Competitiveness — Key Sectors and US Market Dependence
The United States is India's single largest export destination. India's merchandise exports to the US span pharmaceuticals (generics, API), textiles and garments, engineering goods (auto components, machinery), gems and jewellery, chemicals, and electronics. India also runs a significant services surplus with the US (IT, BPO, professional services), which is not affected by goods tariffs. The goods trade surplus (India's) with the US was approximately $45 billion in FY2024-25.
- India's total exports to the US: approximately $80-85 billion (goods) + significant services
- Top goods export categories to the US: pharmaceutical preparations (~$9 billion), textiles/garments (~$10 billion), engineering goods (~$8 billion), gems and jewellery (~$8 billion)
- India's pharmaceutical exports to the US: Generic drugs supply approximately 47% of US generic drug prescriptions; India is the world's largest generic drug manufacturer
- The interim India-US deal included 0% duty on Indian generic pharmaceuticals — critically important for this sector
- Textile exporters: Compete with Bangladesh, Vietnam, Cambodia for US market share; a 15% US surcharge erodes price advantage over competitors facing the same flat rate
- Engineering goods: Auto components major; competitiveness depends on whether US imposes additional Section 232 tariffs on auto parts
Connection to this news: For Indian exporters, the 15% Section 122 surcharge replaces the higher 25%/18% reciprocal duties — a marginal improvement, though the flat rate applies globally, meaning India's relative competitive position vis-a-vis other exporters is unchanged at the surcharge level.
Most Favoured Nation (MFN) Principle and WTO Obligations
The Most Favoured Nation (MFN) principle under the WTO's General Agreement on Tariffs and Trade (GATT) — Article I — requires each WTO member to grant equal tariff treatment to all other WTO members. If one country reduces tariffs for any trading partner, it must extend the same treatment to all WTO members. The US Section 122 surcharge applies as a universal rate to all countries, making it technically MFN-compliant in structure (same rate for all), though its WTO legality under Article XII (balance-of-payments safeguards) remains contested.
- GATT Article I: MFN principle — equal treatment for all WTO members
- GATT Article II: Tariff bindings — US cannot raise tariffs above bound rates (except under safeguard or balance-of-payments exceptions)
- GATT Article XII/XVIII: Balance-of-payments exceptions — allow temporary import restrictions; subject to IMF consultation
- WTO Appellate Body: Non-functional since 2019 due to US blocking appointments; India cannot effectively appeal at WTO
- Multi-Party Interim Appeal Arbitration Arrangement (MPIA): Alternative WTO dispute mechanism; India is a participant but US is not
- Section 232 tariffs: Steel (25%) and aluminium (10%) face separate US tariffs; continue unaffected by the IEEPA ruling
Connection to this news: India's exporters face a complex tariff landscape — MFN rates + Section 232 (steel/aluminium) + Section 122 (15% temporary global surcharge) + potentially Section 301 (unfair trade practices). The BTA, once concluded, would establish India-specific rates that could undercut the surcharge structure.
India's Export Promotion Architecture
India's export promotion is coordinated through the Ministry of Commerce and Industry. The Foreign Trade Policy (FTP) 2023-28 is the current governing framework, replacing the five-year FTP 2015-20. Key export promotion instruments include: duty drawback, export credit (ECGC), advance authorisation, export-oriented units (EOUs), and special economic zones (SEZs). The RBI also manages the External Commercial Borrowings (ECB) framework and export financing.
- Foreign Trade Policy 2023-28: Released March 31, 2023; focus on export facilitation, reducing transaction costs, e-commerce exports, and district-level export hubs
- ECGC (Export Credit Guarantee Corporation): Provides credit insurance to Indian exporters against payment default risk
- Export-Import Bank of India (Exim Bank): Provides long-term trade financing; important for capital goods exports
- Special Economic Zones (SEZ) Act, 2005: SEZs offer duty-free imports of capital goods and raw materials for export production
- Services exports from India: $340+ billion (FY2024-25); IT services ~$200 billion; not directly affected by goods tariff changes
- Remittances from India diaspora in the US (~4.3 million Indian-Americans): Separate from trade flows; continue unaffected
Connection to this news: Indian exporters affected by the Section 122 surcharge can access FTP instruments (duty drawback, export credit) to partially mitigate the cost impact, while the government's priority is to fast-track BTA Phase 1 to lock in preferential rates before the 150-day Section 122 window expires.
Key Facts & Data
- New tariff on Indian goods (from February 24, 2026): 15% flat Section 122 surcharge
- Previous tariff trajectory: 50% → 25% → 18% (interim deal) → 15% (Section 122)
- Duration of Section 122 surcharge: 150 days (maximum); expires approximately July 2026
- India's goods exports to the US: approximately $80-85 billion
- India's trade surplus with the US: approximately $45 billion
- Indian pharmaceuticals: supply ~47% of US generic prescriptions
- India is the world's largest generic drug manufacturer
- India's GSP benefits: withdrawn June 2019 by the US; not restored as of 2026
- BTA Phase 1 target signing: March 2026; effective: April 2026
- WTO Appellate Body: non-functional since December 2019 (US blocking appointments)
- India is a participant in the Multi-Party Interim Appeal Arbitration Arrangement (MPIA)