Whalesbook
China Becomes India's Top Trading Partner
India's international trade landscape has shifted, with China becoming its largest trading partner in fiscal year 2025-26. Bilateral trade reached an estimated $151.1 billion, surpassing the United States from the previous year. However, this rise in trade comes with a widening deficit with Beijing, totaling $112.16 billion for the fiscal year. India continues to rely heavily on Chinese manufactured goods like electronics and machinery, while its exports to China are mainly commodities. This large imbalance with China remains a persistent challenge as India works to diversify its supply chains.
Goods Exports Face Sharp Decline
India's merchandise exports fell sharply by 7.44% to $38.92 billion in March 2026, the steepest drop in five months. This decline was mainly due to increased geopolitical tensions and uncertainty, especially the conflict in West Asia. Exports to the Middle East plunged over 50%, costing India $3.5 billion in overall export value. The conflict has also significantly disrupted global shipping. Rerouting around the Cape of Good Hope has added one to three weeks to transit times, while freight rates on Asia-to-US routes jumped 30-50%. War-risk insurance costs quadrupled, and bunker fuel costs rose as Brent crude exceeded $82 per barrel. India's heavy reliance on Gulf shipping routes makes it especially exposed to these rising costs.
Services Exports Remain Strong
Despite challenges in merchandise trade, India's services sector shows strong resilience. Services exports for fiscal year 2025-26 are estimated at $418.31 billion, up nearly 8% from the previous year. The services sector now makes up a larger part of India's GDP, reaching 10% in the first half of fiscal year 2025-26. Driven by IT, business, and financial services, this sector helps offset weaknesses in external trade and supports overall stability. New free trade agreements with the UK and Oman are anticipated to boost opportunities in this area.
March Deficit Narrows on Imports Drop
The March trade deficit shrank to $20.67 billion, a nine-month low. However, this reduction was mainly due to a 6.51% drop in imports, including less crude oil and gold, rather than strong export growth. For the full fiscal year, the trade deficit grew to $333.2 billion, partly from more gold and silver imports. The deficit with China, India's top trading partner, keeps widening as high-value Chinese goods enter India, while India exports mainly commodities. Rising shipping costs due to global disruptions pose a significant risk to import prices and export competitiveness, potentially hurting profits and canceling out gains from services exports. Global trade is predicted to slow significantly in 2026, potentially leading to more protectionism and business failures.
Future Outlook Mixed
Commerce Secretary Rajesh Agrawal remains optimistic for 2026-27, highlighting exporter resilience. However, the data suggests a more complex outlook. Exports are expected to remain subdued in April due to ongoing conflict. New free trade agreements with the UK and Oman could offer growth opportunities. Yet, these must be considered alongside a slowing global economy, continued geopolitical instability, and the ongoing trade imbalance with China. Future export growth will rely on diversifying beyond current sectors and managing rising global instability costs.