India remains on trade-turning pitch

BESIDES consumption and investment, trade balance is the third engine determining any country’s economic growth and people’s well-being.

The rude trade shock of merchandise trade deficit catapulting to $42 billion in October, nearly 60% more than last year, may have serious implications for India’s GDP growth and her people’s well-being. Services exports have, however, continued to gain strength, and at $38.4 billion, overtook merchandise exports comfortably. Its surplus of nearly $20 billion, however, could not wipe out merchandise trade deficit, resulting in an overall trade deficit of nearly $22 billion, 141% higher than October 2024.

Despite October’s shocking trade performance, India’s showing in the first seven months was not that bad. The total trade deficit in this period was only marginally worse than last year, by about 10%.

The big and burning question now is how India’s trade performance will fare in the rest of the year. Optimists would like to believe that the October shock was a one-off event. Pessimists see it as an ominous portent of bad things to come. I would like to realistically asses India’s future external trade trajectory and ask if India can get its act together.

For this purpose, it will be useful to divide India’s merchandise trade into five baskets — agricultural commodities, old industrial goods (e.g. textiles, steel, ICE automobiles), new industrial goods (primarily electronic goods, solar energy products and chips), gold and precious metals/stones (captured in gold and gems and jewellery) and energy products (oil, coal, gas, hydrogen etc.).

Services trade can also be better considered in terms of another fivefold services basket — information technology, education and health, financial, transportation and personal services.

India is now an established and stable exporter of agricultural goods and products despite resorting to occasional bans and price restrictions on wheat and rice exports generating close to $40-50 billions of exports every year. India’s structural commodities import dependence is also limited to edible oils, pulses and dry fruits. Agricultural exports consistently far exceed imports. With a steady export surplus, there is no material concern on agriculture trade front.

A major meltdown happened in the case of exports of old industrial goods in October. All major exports in this class — organic and inorganic chemicals, engineering goods, plastic and linoleum and cotton and manmade textile exports fell by 13%-22%. On the contrary, imports of many traditional industrial goods witnessed large increases. Fertilisers import went up by 87% and project imports by 46%. Others like machine tools, electrical and non-electrical machinery saw an import surge between 12% and 20%. India is not a major participant in global value chains of most old industrial goods and continues to have major import dependence. There are no products which the world necessarily have to import from India. Worsening trade balance in this category is unfortunately likely to persist.

New industrial goods are global growth engines of production and exports. India is only a marginal player there. While India’s electronic goods exports witnessed an impressive 19% growth in October, thanks largely to Apple, none of the other new industrial goods even figure in India’s exports. On the contrary, India has enormous import dependence for these products. Electronics goods and electrical and non-electrical machinery products, which include solar cells and modules, went up in double digits. India’s electronics exports growth are slowing – only 19% in October, whereas the last seven months growth average is 38%. As exports of Apple Iphones mature and PLI on large electronic products gets wound up, there will be downward pressure on electronics goods exports.

India is a large importer of all fossil fuels, whether oil, gas and coal. International prices have been falling but are asymmetrically reflected in India’s trade. While petroleum imports in value reduced by 4.5%, exports fell sharply by16.3%. With renewable energy transition at a slow pace, India’s dependence on energy imports will keep trade deficit under pressure.

India’s fascination for gold has not seen any moderation despite gold prices shooting up by 50% in 2025. India imported nearly $15 billion gold in October, a 200% increase, almost at par with petroleum products. Silver imports are up by 528%. International gold and silver prices are settling at high levels with serious concerns on India’s trade balance.

India’s gems and jewellery exports, despite rise in gold prices, witnessed about 30% fall in October. With Trump tariffs hurting gems and jewellery exports, India seems to be on a sticky wicket.

Services exports continue to do well. In seven months, services exports grew by nearly 10%. Services imports, which are only about 50% of services exports, recorded smaller growth of a little over 3%. India’s services exports though are hugely dependent on information technology services (more than 60%). A structural transformation is underway globally in terms of technology and immigration policies. While global capability centres (GCCs) exports from India are growing well, traditional business process outsourcing (BPO) and other IT services exports are slowing down/declining.

With artificial intelligence, auto-programming and IT capabilities rising all over, IT services exports are unlikely to maintain a good growth over a longer time frame. India has not got its act together in most other services exports, whether travel, education, transport — our exports remain highly subdued, whereas imports keep growing. While India’s edge in services exports seems secure for some years, its moderate growth will impact its trade surplus.

On the whole, India remains on a turning pitch. India’s path will remain unsteady unless it undertakes fundamental reforms and measures. We need to conclude long-pending foreign trade and investment agreements/treaties with US, EU and also China to make India a production and export powerhouse for new industrial products (including automobiles). We need to open up education, health, accounting, legal and personal services and thoroughly overhaul travel and transport infrastructure and services to build new services export growth engines.

If we keep skidding from one negotiation to another without completing deals and don’t undertake reforms, India’s merchandise exports is likely to stagnate for many years. In the current year, merchandise trade deficit might end up around $350 billion and overall trade balance might touch $125 billion.