New Delhi is furious about a threat of trade sanctions made by the U.S. Trade Representative's (USTR) office over its protection of intellectual property rights (IPR), preference for domestic producers and non-trade barriers.
Ahead of a general election, Prime Minister Manmohan Singh's government does not want to be seen as bowing to U.S. pressure, amid lingering tension over the recent arrest and strip search of a female diplomat in New York suspected of visa fraud.
On Wednesday, the National Association of Manufacturers (NAM) - which represents about 50 U.S. business groups - asked the USTR to designate India a Priority Foreign Country in its 2014 report.
"This designation appropriately would rank India among the very worst violators of intellectual property rights and establish a process leading to concrete solutions," NAM said in a letter to U.S. Trade Representative Michael Froman.
The USTR is holding public hearings for its annual report due in April. The report will provide details on nations denying protection of IP rights or fair market access to U.S. firms.
India is widely perceived in Washington as a serial trade offender, with U.S. firms unhappy about imports of everything from shrimp to steel pipes they say threaten jobs, as well as a lack of fair access to the Indian market for its goods.
This month, Washington said it was filing its second case at the WTO over domestic content requirements in India's solar programme, which aims to ease energy shortages in Asia's third-largest economy.
There are 14 past or current WTO cases between India and the United States, whose bilateral trade in goods measured $63.7 billion last year, not including the latest case.
India has since hardened its stance, instructing officials not to entertain any request from the United States International Trade Commission (USITC) - a quasi-judicial federal agency - to examine its trade practices.
India's trade ministry has also "advised" U.S Deputy Trade Representative Wendy Cutler to put off a visit to India that had been scheduled for late March due to the parliamentary election due in April or May, a senior official told Reuters.
The official said India had asked for alternative dates for the visit, possibly after the elections, adding that the decision was not linked with the trade tension.
A spokeswoman for the USTR said officials from both governments continued to engage in constructive discussions on trade and investment issues and to seek out opportunities for further economic collaboration.
The USTR listed in a February 12 report markets in Delhi, Mumbai and Hyderabad as being among the worst offenders globally for the sale of pirated software and counterfeit goods.
A visit by the USITC delegation to meet officials from the Indian commerce, industry, health, telecom and finance ministries has also been put on hold.
A USITC spokeswoman confirmed the delay, saying they were looking for "other windows" for a visit, but declined to comment on the reasons for the delay.
Newly appointed Trade Secretary Rajeev Kher, who pushed India's stand on food security issues at a WTO meeting in Bali, as chief WTO negotiator, has told his officials to tackle bilateral trade disputes preferably through multi-lateral forums.
India has also urged President Barack Obama's administration not to fall prey to special interest groups and consider trade issues in the context of the wider economic and strategic relationship between the two countries.
Officials say any move towards putting India on a priority foreign countries list would hurt bilateral relations.
"There are clear stresses in the India-US trade, economic relations," said another government official who, like others who spoke to Reuters, declined to be identified due to the sensitivity of the matter.
"If it is a strategic relationship, they should be looking at the larger picture."