India's Trade Deficit Grows to $119B on Import Surge; FTAs, Remittances Aid

Imports Surge, Driven by Precious Metals

India's trade deficit for fiscal year 2025-26 reached $119.3 billion, a 26% increase from the $94.6 billion deficit in FY25. This widening, the second-largest in 11 years, was largely driven by a 6.4% rise in imports, totaling $979.4 billion. High prices for gold and silver significantly boosted import costs. Gold imports increased due to higher prices, while silver imports rose from both price hikes and increased purchasing volume. These precious metal imports alone added substantially to the nation's import bill. In February 2026, merchandise imports jumped 24% year-on-year, mainly due to gold and silver purchases. The Indian Rupee also weakened, trading around 0.01073 against the US Dollar on April 15, 2026, and depreciating 1.12% over the prior month.

Exports Show Modest Growth

Despite the rise in imports, India's exports grew by 4.22% during the fiscal year. Merchandise exports increased by 1% to $441.78 billion. Key sectors driving this growth included electronic goods, engineering goods, meat, dairy and poultry products, marine products, mica, and minerals. Exports to China and Spain saw notable increases of $5 billion and $2 billion respectively. Shipments to the US and UAE also expanded, though the trade surplus with the US narrowed. Services exports remained strong, estimated at $418.31 billion for the fiscal year, highlighting India's growth in sectors like IT and business services.

Geopolitics Disrupt Trade Flows

Trade flows, particularly in March 2026, were significantly affected by escalating geopolitical tensions in West Asia. Exports to the region dropped by 57.95%, a decline of $3.5 billion year-on-year, while imports from West Asia fell by 51.6%. This regional instability impacted critical maritime corridors like the Strait of Hormuz and the Red Sea, raising concerns about supply chain disruptions, higher freight costs, and shipment delays globally. Merchandise exports for March 2026 stood at $38.92 billion, down from $42.05 billion in March 2025. These disruptions widened the merchandise trade deficit in February 2026 to $27.1 billion, nearly doubling from the previous year.

New Trade Deals to Boost Exports

In response to global trade volatility, India is actively pursuing new free trade agreements. The FTA with the UK is expected to take effect around May 1, 2026, offering 99% duty-free entry for Indian goods. The India-Oman Comprehensive Economic Partnership Agreement (CEPA) is anticipated to be operational by June 1, providing significant duty-free access for Indian exports. Negotiations for a trade deal with the European Union concluded in January 2026, with implementation expected by early 2027. The India-New Zealand FTA is also expected to be signed shortly. These agreements aim to improve market access for Indian exporters.

Remittances Provide Crucial Support

Remittance inflows continue to provide a buffer against trade deficit pressures. India's remittances are estimated to have financed 47% of its merchandise trade deficit in FY25, reaching a record $135.46 billion. The remittance market is projected for continued growth, driven by digitalization and increasing cross-border migration. These inflows offer an important financial buffer and support domestic economic development.

Risks Remain for Trade Balance

While new trade agreements and remittances offer positive signs, significant risks persist. The widening trade deficit, driven by price-sensitive imports like gold and silver, exposes India to imported inflation and potential currency depreciation. Geopolitical instability in West Asia poses a major threat, impacting trade routes and increasing logistics costs. A spike in crude oil prices could inflate the deficit further, as every $10 per barrel increase could widen the Current Account Deficit (CAD) by 30-40 basis points. Although exports are growing, the slower growth in merchandise exports compared to services highlights a vulnerability in the goods trade. The high reliance on imported commodities with surging prices presents a challenge that could continue to pressure the trade balance. The Indian Rupee's weakening trend adds further risk, potentially increasing import costs.

Economic Outlook Positive Despite Challenges

Analysts project India's CAD to be around 1.0% of GDP in FY2026, an increase from 0.6% in FY2025. Despite this, the economy is forecast for robust GDP growth, with Goldman Sachs anticipating 6.9% year-on-year growth in 2026. The Nifty 50 index, despite volatility from geopolitical factors, rallied on April 15, 2026, closing above 24,200 points, indicating investor confidence. The Nifty Capital Markets index has also outperformed the Nifty 50 year-to-date in 2026.