India-U.S. Trade Deal Unlocks Key Sector Opportunities

India and the United States have forged a significant trade pact that lowers tariffs on Indian exports from 25% to 18%. The agreement, announced by Trump, also includes a commitment from India to halt purchases of Russian crude oil and instead buy from the U.S. and potentially Venezuela.

According to the announcement, India has pledged to purchase $500 billion worth of American agriculture, technology, energy, and other products. This development comes less than a week after India finalized a major free trade agreement with the European Union, signaling a rapid realignment of its global trade relationships.

While many specifics of the U.S. deal are still being finalized, investors are already identifying key sectors poised to benefit.

Manufacturing and Exports Set for a Major Boost

India's labor-intensive export sector is seen as a primary winner. According to James Thom, senior investment director at Aberdeen Investments, industries like textiles, clothing, leather, jewelry, toys, and furniture now have a clear opportunity to reclaim market share from regional manufacturing rivals.

The new 18% tariff rate positions India more competitively against:

• Pakistan: 19% tariff

• Vietnam: 20% tariff

• Bangladesh: 20% tariff

Thom noted that small and medium-sized companies are particularly well-positioned to gain from the tariff reduction. He added that the agreement should also provide a lift to banks, non-banking financial companies, and export-focused manufacturers, boosting overall retail sentiment in small and mid-cap stocks.

A Strategic Win with Geopolitical Implications

Analysts at Bernstein suggest that last week's India-EU treaty likely prompted the U.S. to accelerate its own deal with India. The agreement brings India more in line with its peers in the Association of Southeast Asian Nations (ASEAN), which analysts called "incrementally a big positive." It also enhances India's competitive standing relative to China.

While certain industries like autos and metals might still face sector-specific tariffs, the improved diplomatic climate is expected to create broad-based advantages.

IT and Pharma Emerge as Key Beneficiaries

Bernstein analysts Venugopal Garre and Nikhil Arela highlighted that India's information technology sector stands to gain significantly. Although the trade pact primarily covers manufactured goods, the improved U.S.-India relations are expected to reduce regulatory scrutiny on I.T. services and lower the risk of future punitive actions, such as additional taxes.

Based on this, the analysts outlined a tactical "buy" recommendation for Indian equities, with a short-term rebound expected in financials, I.T., and telecoms.

Meanwhile, the recent EU trade deal has put a spotlight on India's pharmaceutical industry. According to BMI, Fitch Ratings' research unit, the elimination of 11% tariffs on EU drug imports—covering cancer therapies, biologics, and GLP-1s—is a game-changer. These imports amounted to $1.2 billion in 2024.

BMI forecasts that lower import costs and more efficient supply chains will drive India's pharmaceutical market from $31.2 billion in 2025 to $45.7 billion by 2035, representing a compound annual growth rate of 5.2%. The EU agreement is also expected to help Indian firms diversify their export markets and reverse recent stagnation by streamlining regulatory compliance and reducing administrative costs.

Market Reaction and Investor Outlook

The trade announcement immediately lifted market sentiment. Russ Mould, investment director at A.J. Bell, pointed to the Sensex's 2.5% rise as evidence of renewed investor confidence. The Sensex index tracks 30 of the largest and most actively traded companies on the Bombay Stock Exchange.

The positive momentum extended to UK-listed investment trusts with Indian exposure. Ashoka India, for instance, saw its shares climb 5.6% on the FTSE 250.

"India has been a rich source of returns for investors over the past few decades, but Trump's tariff regime stalled momentum in the Sensex index," Mould said. "Investors will now be wondering if the trade deal effectively removes the shackles on the market and breathes new life into it, rather than simply resulting in a short-term relief rally."