India’s trade pact with the US leaves much to be desired but will ease a crushing overhang on the rupee. Ten months into President Donald Trump’s trade war, the South Asian country is emerging bruised but at least more integrated into the global economy.

Washington is slashing its tariff on imported Indian goods to 18 percent from 50 percent in exchange for a promise from Prime Minister Narendra Modi’s administration to halt buying Russian oil, Trump announced late on Monday, adding that India has committed to buy $500 billion of US-made goods. Modi’s own post did not mention what India has conceded, but it appears to fulfil Washington’s demand for lower Indian tariffs on sectors like autos and includes petroleum and defence goods.

Still, even by Trump’s standards, the arrangement is short on details. Washington’s approach appears slapdash ahead of an expected US Supreme Court ruling on the lawfulness of Trump’s trade regime. As of Tuesday afternoon India time, there was no timeline for when the lower tariff would take effect. The purchasing commitment Trump says India has agreed to also seems absurd: the US currently supplies just $46 billion of India’s $690 billion annual imports, of which only $192 billion is fuel.

Nonetheless, the broad contours were positive enough to support Indian markets: the rupee , the worst-performing Asian currency of 2025, moved over 1 percent higher to 90.37 against the US dollar, while the benchmark Nifty 50 Index of stocks rose 5 percent. The revised tariff imposed by India’s largest trading partner is lower than the 20 percent Washington charges shipments from Vietnam and Bangladesh. That restores a potential advantage for India that global investors first expected back in April. It will also ease fears that the Trump administration will turn hostile on India’s IT services, a much larger-value export to the United States.

New Delhi may eventually rue giving up autonomy on its global energy purchases, a pillar of its attempt to maintain a non-aligned foreign policy. But in the short term, the US pact removes the biggest external roadblock to India’s growth and will reduce the need for the government to borrow more to prop up employment-intensive industries like textiles. One day, India might even thank Trump for spurring it to shore up its trade ties. Including a deal struck last week with the European Union after years of delays, Modi has secured agreements with its two largest markets together taking 36 percent of Indian exports, BNP Paribas analysts note. That’s some consolation for a bullied partner.

US President Donald Trump on February 2 said Washington will slash its tariff on Indian goods to 18 percent from 50 percent in exchange for India halting purchases of Russian oil and lowering trade barriers.

Trump said Indian Prime Minister Narendra Modi also committed that India would buy American goods worth more than $500 billion, including energy, coal, technology, agricultural and other products. Trump did not provide a timeline for those purchases, nor for when the lower tariff would go into effect.

Modi announced the revised US tariff in a separate post on social media platform X, without mentioning any concessions made by India.

The US deal addresses Washington’s ask to cut high Indian tariffs on sectors like autos, petroleum, defence, electronics, pharma, telecom products, aircraft and some agriculture products, and that talks for a more comprehensive deal with more sectors are to continue, an unnamed Indian government official told Reuters on Tuesday.

The Trump administration has been racing to complete framework trade deals with major trading partners before the US Supreme Court rules on whether to strike down Trump’s “reciprocal” tariffs under the International Emergency Economic Powers Act.

The interim government’s net borrowing from the banking system rose almost fivefold in the first seven months of the current fiscal year 2025-26, as spending raced ahead of sluggish revenue collection.

The government borrowed Tk 48,819 crore from banks as of January 25, compared with Tk 10,558 crore by January 23 last year, according to Bangladesh Bank (BB) provisional data.

The amount already accounts for nearly half of the full year’s borrowing target of Tk 104,000 crore.

The sharp rise reflects a widening gap between expenditure and income. Government spending has climbed steadily, while revenue collection has failed to keep pace.

The National Board of Revenue posted a 14 percent year-on-year growth in collection in the first six months of FY26, mobilising Tk 185,229 crore. Even so, receipts fell short of the target by about Tk 46,000 crore.

In the same period last year, revenue slipped by 1 percent amid unrest following the political changeover in August 2024.

“This is not a sustainable situation,” said Fahmida Khatun, executive director of private think-tank the Centre for Policy Dialogue (CPD).

She said weak domestic resource mobilisation pushes debt levels higher and leaves little room to manage day-to-day spending. “The revenue collection remains so low that it is difficult to manage regular expenditure.”

According to the economist, the country’s persistently low tax-to-GDP ratio has made the government increasingly reliant on bank borrowing, driving up debt and interest payments.

In FY25, interest payments reached a record Tk 132,460 crore, almost one-fifth of total budget spending, according to the finance ministry’s debt bulletin.

For the current year, interest costs stand at Tk 122,000 crore, accounting for 13 percent of the budget.

As debt servicing takes up a larger share of public funds, allocations for education, health and infrastructure are squeezed, undermining long-term growth prospects.

Fahmida said that unless tax collection grows fast, heavier government borrowing from banks will also tighten credit for the private sector.

Ashikur Rahman, principal economist at the Policy Research Institute (PRI), warned that a risky cycle is beginning to take hold.

Higher borrowing, he said, feeds directly into a growing interest burden within the fiscal framework.

“As debt servicing absorbs a larger share of public expenditure, fiscal space for productivity-enhancing investments, particularly in human capital, health, education, and critical infrastructure, shrinks,” he explained.

Over time, this trade-off weakens the state’s ability to address structural development constraints and undermines the quality of growth itself, said Rahman.

Rising government demand for credit also crowds out private firms, pushing up borrowing costs and discouraging investment.

“This is particularly concerning at a time when economic recovery and employment generation depend critically on a revival of private sector confidence and investment momentum,” he added.

The persistence of high borrowing also points to deeper weaknesses on the revenue side. Despite some gains, collections remain far below what is needed to finance public spending in a sustainable way.

“This points to longstanding deficiencies in tax policy design, tax administration, and compliance. Without a durable improvement in domestic resource mobilisation, borrowing risks becoming a default adjustment mechanism rather than a temporary counter-cyclical tool,” he said.

Breaking the cycle, Rahman said, will require prudent debt management alongside credible revenue reforms and a clear medium-term fiscal strategy that shifts spending towards growth-enhancing priorities rather than debt servicing.

More pressure is expected in the months ahead. The rollout of a new pay scale for government employees will require an additional Tk 106,000 crore, around one-fifth of total operating expenditure for the year.

CPD’s Fahmida suggested the increases should be phased in.

Otherwise, she said, maintaining fiscal balance will become one of the toughest challenges for the next government.

Bangladesh is stepping into a new phase of trade diplomacy as it signs its first Economic Partnership Agreement (EPA) with Japan tomorrow, a deal meant to preserve duty-free market access after the country’s graduation from the least developed country club later this year.

A Bangladesh delegation led by Commerce Adviser Sk Bashir Uddin will leave Dhaka for Tokyo today to sign the agreement, Commerce Secretary Mahbubur Rahman told The Daily Star yesterday.

The EPA, approved by the Advisory Council on January 22, will give Bangladeshi exporters immediate duty-free access to 97 percent of their export basket, including ready-made garments (RMG) and nearly 7,379 other products.

In return, Japan will receive duty-free access to 1,039 products in the Bangladeshi market.

Automobiles from Japan, home to global brands such as Toyota, Honda and Subaru, will not enjoy duty-free entry under the deal, according to the commerce secretary.

Rahman said the move is deliberate to encourage Japanese entrepreneurs to invest directly in Bangladesh’s vehicle segment.

Officials believe this could prompt “handsome” investment in local vehicle manufacturing, possibly reshaping the country’s automotive industry.

Japan is already Bangladesh’s largest export destination in Asia, with annual shipments hovering around $2 billion, mostly garments.

Imports from Japan, however, have remained relatively steady at around $1.8 billion to $2.7 billion in recent years, according to data from the Bangladesh Bank and the Export Promotion Bureau (EPB).

Officials say the EPA could help narrow this trade deficit by boosting exports while drawing Japanese capital into industrial zones across the country.

Apart from tariffs, the agreement covers trade in services, investment, customs procedures and intellectual property rights, according to the commerce ministry.

“We are expecting a major shift of Japanese investment in Bangladesh under this EPA, as Japan is looking for a favourable investment destination and is choosing Bangladesh,” Commerce Secretary Rahman said.

At present, Japanese investment in Bangladesh stands at about $500 million, a small slice of Japan’s global investment. Still, several Japanese firms have already set up operations at the dedicated Japanese economic zone at Araihazar in Narayanganj district.

Under the deal, Bangladesh will open 97 service sub-sectors to Japan, while Japan will open 120 to Bangladesh. Officials expect this to speed up technology transfer and encourage long-term investment.

According to commerce ministry documents, garments will receive immediate duty-free access under Single Stage Transformation rules, a major win for the local RMG sector as the country prepares for the post-LDC competition.

For years, Bangladesh has been looking for trade agreements with major partners and blocs, including India, Turkey, Malaysia, China, the UAE, Indonesia, Nepal, Asean and the Regional Comprehensive Economic Partnership (RCEP), to widen its footprint in Asian, African and Latin American markets.

Until now, the country has only signed a Preferential Trade Agreement (PTA) with Bhutan in 2020. This EPA with Japan marks its first full-fledged trade deal.

Dhaka and Tokyo had been progressing towards this deal since 2022, when then prime minister Sheikh Hasina said Bangladesh was open to negotiating free trade agreements, including with Japan.

Subsequently, a joint study group was formed. Talks gathered pace in July 2023, with both sides signalling their intention to sign the EPA by late 2025 or early 2026, ahead of Bangladesh’s LDC graduation.

Momentum picked up after the Advisory Council gave its nod on January 22 this year, following Japan’s approval of the draft in December.

Last month, Japan also reaffirmed at the World Trade Organisation (WTO) that it would continue duty-free market access for Bangladesh for three more years, up to 2029.

Regarding the EPA with Japan, analysts say this sends a message about the country’s readiness to engage with major economies and trading blocs.

Abdur Razzaque, chairman of local think tank Research and Policy Integration for Development (RAPID), called the deal a positive signal but stressed that its success would depend on execution.

“It is a positive signal for Bangladesh to the foreign investors as it is a testimony that Bangladesh is capable of signing the deal even with Japan,” he said, adding that the country should actively attract Japanese investment, especially in export-oriented sectors such as man-made fibre industries.

Similarly, M Masrur Reaz, chairman of Policy Exchange Bangladesh, called the agreement an excellent development.

“This EPA will enable Bangladesh to be a partner of a country which is a member of the G-7. It will brighten our image,” he said.

If used well, the deal could also open new doors for foreign direct investment, Reaz added.