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Gavin Maguire
(Reuters) – The fresh 25% tariffs slapped on Indian goods by U.S. President Donald Trump this week are being viewed by many as a negotiating tactic designed to force India to buy more U.S. energy products and other goods going forward.
But even though India’s fast-growing economy is the fifth largest globally, India’s energy importers may have far less room to maneuver than they might appear.
Tight corporate operating margins, cost-sensitive consumer markets, binding long-term import contracts and slowing economic growth all limit India’s ability to spend big on U.S. oil, LNG, coal and refined products over the near term.
At the same time, India’s location at the base of Asia means it is far closer to other major energy product exporters than it is to the United States, which would trigger sharply higher shipping costs if it were to switch to U.S.-origin products.
No doubt some Indian corporations will be cajoled into pledging major U.S. purchases and investments during upcoming trade negotiations, which may boost sentiment in Washington, D.C.
But U.S. exporters of oil, gas, coal and fuels that are hoping for massive, viable and binding purchase commitments by Indian buyers are likely to be left disappointed.
TOUGH SPOT
It’s not just its import needs that India has to worry about.
The United States is by far India’s largest export market, and has accounted for nearly 20% of all Indian exports in recent years, according to International Monetary Fund (IMF) data.
In 2024, the value of India’s exports to the United States was just over $80 billion, while its imports from the U.S. totalled just under $45 billion.
As the U.S. is more than twice as large as India’s next largest export market – the United Arab Emirates – it will be nearly impossible for the country to replace lost U.S. consumers with other buyers.
That means that trade negotiators will remain committed to healing trade ties with Washington as quickly as possible, and will be looking at every possible means of reducing the trade imbalance.
CUT-PRICE CRUDE
The rapid rise in India’s purchases of Russian crude oil since mid-2022 has been a sore point for the U.S. and Europe, and has been a focal point during the recent trade talks.
Average monthly crude oil flows from Russia to India jumped from around 3.2 million barrels a month between 2018 and 2021 to 50 million barrels a month since mid-2022, data from Kpler shows.
That more than 15-fold surge in Russian oil purchases by India provided Moscow with critical import earnings while it grappled with the fallout from its war in Ukraine, and seriously undermined international efforts to cut funding to Moscow.
However, while India’s refusal to join Western-led sanctions drew ire from the international community, its willingness to step up imports of Russian oil ensured that its refiners and fuel consumers were shielded from any rise in global oil prices.
Indeed, the opposite has occurred as Indian importers were able to extract steep discounts from Russian oil sellers who were desperate to secure sales wherever they could.
Those cheap imported Russian barrels in turn allowed major Indian refiners such as Reliance to expand supplies and fuel the country’s economic growth since 2020.
Indian authorities have stated that providing energy security for its 1.4 billion population has been the main driver of its oil import programme, and that the new tariffs are unfair given that the country is only acting in its own self-interest.
What’s more, any aggressive pivot away from cheap Russian oil to pricier U.S. crude would drastically change the economic outlook for Indian oil refiners and consumers, and likely result in a surge in fuel prices that would cause economic harm.
Since 2022, the official prices of the main grade of Russian oil imported by India have averaged around $70 a barrel, which is around $10 cheaper than the price of the main U.S. crude for export over that same period, data from LSEG shows.
As Indian importers likely secured their Russian oil supplies at even lower prices, the real discount compared to U.S. prices is likely larger.
That in turn means that there is almost no prospect of Indian refiners being able to profitably switch to U.S. crude any time soon, even if pressured to do so.
LNG & COAL LONGSHOTS
U.S. trade negotiators have touted U.S. liquefied natural gas (LNG) as a means of reducing trade gaps, as a single LNG cargo can cost several million dollars.
However, Indian energy product importers have arguably even less scope to switch out current suppliers for the U.S. here.
The primary limiting factor is that Indian gas importers are already locked into long-term purchase deals with suppliers such as Qatar and the United Arab Emirates, and face stiff penalties for breaking contracts.
And even if Indian buyers were prepared to tear up those deals in favor of buying from the U.S. instead, they would face a surge in shipping costs that could make overall cargo costs uneconomical.
The journey time for an LNG tanker from the U.S. to India is around 30 days, which is six times longer than the trip from Qatar.
U.S. coal exporters will likely face similar difficulties in dislodging Indonesia from India’s coal import pipeline.
The Indonesia to India shipping time is around 11 days, compared to around 27 days for the trip from the U.S. East coast.
Such a yawning gap in journey times and shipping costs means that India’s trade negotiators may not be able to rely on its energy consumers to close the trade gap, and will need to look elsewhere to secure a trade deal with the U.S.
The opinions expressed here are those of the author, a columnist for Reuters.
Reporting by Gavin Maguire; Editing by Jacqueline Wong
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