The lines between India’s foreign policy, domestic politics and economy will become increasingly blurred in 2026

The lines between India’s foreign policy, domestic politics and economy will become increasingly blurred in 2026

It will become increasingly hard for the Modi government to offset foreign policy setbacks with domestic successes as the full impact of US tariffs starts to bite.

2025 was arguably India’s most challenging foreign policy year. The four-day conflict with Pakistan in May was followed by a downturn in India–US relations. The Trump administration imposed 50 per cent tariffs on India over its purchase of Russian crude and the failure to secure a trade deal by the agreed deadline. Adding insult to injury, Washington increased its outreach to Islamabad. There was also instability in India’s neighbourhood, including the so-called Gen Z protests in Nepal and a downturn in relations with Bangladesh after Sheikh Hasina was removed from power and fled to India in 2024.

The Modi government sought to downplay these setbacks by pointing to successes on the domestic front, including electoral successes for Prime Minister Narendra Modi’s Bharatiya Janata Party in state elections, economic reforms – including reforms to its goods and services tax and new labour codes – and free trade deals with the UK, Oman and New Zealand. Despite the challenges of US tariffs, India remained the world’s fastest growing major economy, recording 8.2 per cent growth between July and September thanks in part to its large domestic market.

However, in 2026 the lines between foreign policy, domestic politics and the economy are likely to become increasingly blurred. The latest GDP growth data was before the full force of Trump’s tariffs came into effect, so they will begin to have a more sustained impact on the economy the longer they remain in place. Washington is also considering additional sanctions on countries doing business with Russia. This economic impact could have a knock-on effect on the country’s politics as India will hold elections in four states and one Union Territory in 2026.

The Modi government will be hoping that trade diversion efforts help alleviate some of these pressures. A key watchpoint will be the conclusion of a trade deal with the European Union, India’s leading trade partner. However, the negotiations have been on and off since 2007 and a deadline to conclude a trade deal by the end of last year was missed. Both sides will be seeking to conclude the deal ahead of European Commission President Ursula von der Leyen’s visit to India later this month.

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