The Cotton Trap? Inside India’s $500B US Trade Deal

The era of 50% punitive tariffs is over. Following a decisive February 2 call between PM Modi and President Trump, India and the U.S. have hit the "reset" button. The headline? A reciprocal tariff cap of 18% on most Indian goods.

But the real story isn't the 18%. It’s the 0%.

The "Bangladesh Parity" Panic

Earlier this week, panic rippled through the textile hubs of Tiruppur and Surat. The reason? The U.S. handed Bangladesh a "Cotton for Zero-Tariff" deal.Suddenly, Indian garments—taxed at 18%—looked "dead on arrival" against Bangladeshi rivals at 0%.

Commerce Minister Piyush Goyal’s response was swift: "India also has the same facility, and India will also get it. The catch? It’s all in the fine print.

The System: How the "Cotton Clause" Actually Works

To hit 0% duty, Indian manufacturers cannot simply use Indian cotton. The mechanism is a strictly reciprocal loop:

1. Source: India must import U.S.-produced cotton or man-made fibers

2. Process: Transform that raw material into apparel within India.

3. Export: Send it back to the U.S. at zero reciprocal tariff.

The systemic trade-off: India gains market access but effectively becomes a "conversion hub" for American raw materials.

Stakeholders: Who Wins, Who Bleeds?

• The Winners: Large-scale garment exporters like Arvind Ltd and KPR Mill. They gain the flexibility to choose between 18% duty (using Indian cotton) or 0% (using US cotton) depending on the order volume

• The Losers: Small-scale cotton farmers. If Bangladesh and India both pivot to U.S. cotton to chase the 0% carrot, the $1.6 billion export market for Indian cotton yarn faces a structural glut.

• The Government: It’s a political tightrope. Goyal has dismissed Opposition claims of "uncompetitiveness" as a lie, insisting that 90-95% of farm produce remains protected.

What’s Alleged vs. What’s Proven

The Opposition, led by Rahul Gandhi, alleges that India has been "rendered uncompetitive" before the ink is dry. The Ministry counters that the 18% floor actually puts India ahead of China (34%) and on par with Vietnam (20%)

The Fact: The specific volume of the "zero-duty quota" for India is still being finalized. We won't see the hard numbers until the interim agreement is signed in mid-March 2026.

What Happens Next?

Watch the March signing. The "fine print" will reveal the exact ratio of U.S. cotton imports required to trigger the 0% benefit. For investors, the immediate 18% reset provides "margin recovery," but long-term growth depends on how aggressively India can scale its PM MITRA parks to handle this new U.S.-centric supply chain.

FAQ: The India-US Trade Deal 2026

1. What is the new tariff on Indian textiles?Most Indian textiles will face an 18% reciprocal tariff, down from the previous 50% spike. 

2. How can Indian exporters get 0% duty?Exporters must use U.S.-origin raw materials (cotton or man-made fibers) to qualify for the zero-duty quota.

3. Does this hurt Indian cotton farmers?The government claims 90-95% of farm interests are protected, but if garment makers switch to US cotton for the tax break, domestic cotton prices could face downward pressure.

4. When does this deal go into effect? The 18% tariff reset is effective immediately. The full "interim agreement" with the zero-duty specifics is expected in mid-March 2026.

5. How does this compare to Bangladesh? Bangladesh faces a 19% general tariff but has the same "Cotton-for-Zero" access. India holds a 1% general advantage at the 18% rate.

6. Which sectors besides textiles benefit?Gems and jewelry, pharmaceuticals, smartphones, and select machinery parts also see significant tariff rollbacks.