Whalesbook
A Q3 FY26 report from NITI Aayog highlights a notable trend: India's trade with its Free Trade Agreement (FTA) partners is showing a significant imbalance. Despite increasing integration, exports to these partners have slowed, contributing to a growing trade deficit.
Trade Imbalance with FTA Partners Grows
In the third quarter of fiscal year 2026, India's exports to its FTA partners decreased by 7% year-on-year, totaling $40.26 billion. This follows declines seen in the previous quarters. Meanwhile, imports from these same FTA nations increased by 6% to $70.98 billion during the same period. This substantial gap has widened the trade deficit with these preferential trading partners.
Key Trade Figures and Country Trends
Key contributors to the export slowdown included Singapore (down 34%), Australia (down 22.2%), Bhutan (down 22.9%), and Mauritius (down 14%). Some markets, however, saw positive growth, such as Thailand (up 8.3%) and Sri Lanka (up 9.9%). India's trade deficit with FTA partners has been a persistent issue, with FTAs often leading to higher imports than exports. The share of India's trade with FTA partners has grown substantially over the past two decades, from 4.6% in 2006 to 28.8% in 2024, indicating deeper integration but also greater exposure to this deficit trend.
Global Economic Pressures and Services Strength
The downturn in merchandise exports is happening amidst broader global economic challenges. These include a general slowdown in global demand, disruptions from geopolitical tensions in West Asia affecting shipping costs and supply chains, and protectionist trade policies from major economies like the US and EU. For example, the US has imposed tariffs, and the EU is implementing its Carbon Border Adjustment Mechanism (CBAM), adding complexity for Indian exporters. Despite these external pressures on goods trade, India's services sector has remained strong. Services exports continue to outpace goods trade and provide important support to the country's overall balance of payments. The total trade growth, boosted by services, has maintained a stable pace in recent quarters.
Challenges in Maximizing FTA Benefits
Analyses suggest that while India's Free Trade Agreements have boosted overall trade volumes, their success in promoting balanced export growth has been mixed. Many FTAs have disproportionately benefited imports, leading to ongoing trade deficits with key partners. Challenges in implementation, such as non-tariff barriers, regulatory hurdles in partner countries, and limited awareness or use by Indian businesses, have also constrained the potential benefits. Experts point out that moving beyond tariff reductions to address these underlying issues, improve value addition, and better integrate supply chains is crucial. This means that simply signing more trade agreements needs to be matched by focused execution and stronger domestic competitiveness.
Risks of Persistent Deficits
This persistent trade deficit with FTA partners, despite increased trade share, suggests these agreements might be facilitating imports more than driving export growth. This underlying imbalance poses risks to India's current account deficit and currency stability. A heavy reliance on imports, particularly for commodities like crude oil and gold, worsens this vulnerability. While services exports offer a buffer, their performance can be affected by global economic shifts. Furthermore, the effectiveness of FTAs can be hampered by complex rules of origin and non-tariff barriers, which can disproportionately affect smaller Indian businesses, creating confusion that hinders broad use. The recent export slowdowns in markets like Singapore and Australia indicate that even established FTA relationships face significant pressures, suggesting potential overestimation of export potential or an underestimation of competitive challenges.
Future Trade Strategy Focus
Looking ahead, analysts emphasize that India's focus must shift from signing new trade agreements to achieving tangible export results and improving domestic execution. Future trade strategies will depend on addressing product quality, cost competitiveness, and deeper integration into global value chains, rather than just relying on preferential market access. Ongoing geopolitical uncertainties and global protectionist trends suggest the environment for merchandise exports will remain challenging. This could lead to a further widening of the trade deficit in FY27. While services exports are expected to continue growing, their capacity to fully offset merchandise trade pressures remains a key concern for overall economic stability.