Context:
India’s economic engagement through Free Trade Agreements (FTAs) is a key pillar of its strategy to boost exports, diversify markets, and integrate into global value chains. The NITI Aayog ‘Trade Watch Quarterly’ report for Q1 FY26 highlights worrying trends in India’s trade balance with its FTA partners.
Key Findings:
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- Rising Trade Deficit with FTA Partners
- Between April and June 2025, India’s trade deficit with FTA countries widened by 59.2%. Imports rose by 10% to USD 65.3 billion, while exports declined by 9% to USD 38.7 billion.
- The expansion in the deficit was largely driven by falling exports to the ASEAN region, India’s largest FTA export destination.
- Between April and June 2025, India’s trade deficit with FTA countries widened by 59.2%. Imports rose by 10% to USD 65.3 billion, while exports declined by 9% to USD 38.7 billion.
- Decline in Exports to Key FTA Countries
- Exports to ASEAN contracted by 16.9%, with sharp declines recorded in Malaysia (-39.7%), Singapore (-13.2%), and Australia (-10.9%).
- Exports to the UAE, India’s second-largest FTA partner, declined marginally by 2.1%.
- In contrast, modest gains were seen in South Korea (+15.6%), Japan (+2.8%), Thailand (+2.9%), and Bhutan (+10.2%).
- Exports to ASEAN contracted by 16.9%, with sharp declines recorded in Malaysia (-39.7%), Singapore (-13.2%), and Australia (-10.9%).
- Structural Divergence in Export Performance
- Petroleum exports witnessed a sharp decline, reflecting global price and demand trends.
- Electronics exports surged by 47% year-on-year, accounting for over 11% of total exports. This reflects India’s deeper integration into global supply chains, with electronics emerging as a sunrise sector that partially offset weaknesses in traditional export segments.
- Petroleum exports witnessed a sharp decline, reflecting global price and demand trends.
- Rising Trade Deficit with FTA Partners
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Implications for India’s Trade Strategy:
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- Need for Enhanced Competitiveness
- The report underlines the need to strengthen competitiveness within existing FTAs. Export contraction alongside strong import growth indicates a demand recovery tilted towards imported goods and energy inputs rather than domestically produced, export-oriented manufacturing.
- The report underlines the need to strengthen competitiveness within existing FTAs. Export contraction alongside strong import growth indicates a demand recovery tilted towards imported goods and energy inputs rather than domestically produced, export-oriented manufacturing.
- Value Chain Integration
- Deeper integration into global value chains (GVCs) is essential to improve export competitiveness, particularly in higher-technology and higher-value sectors beyond electronics.
- Deeper integration into global value chains (GVCs) is essential to improve export competitiveness, particularly in higher-technology and higher-value sectors beyond electronics.
- Need for Enhanced Competitiveness
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Way Forward:
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- Trade Policy Calibration
- Recalibrate FTAs with greater emphasis on rules of origin, improved market access for labour-intensive sectors, and export facilitation.
- Strengthen diplomatic efforts to accelerate ongoing FTA negotiations and conclude agreements with major partners to reduce trade barriers.
- Recalibrate FTAs with greater emphasis on rules of origin, improved market access for labour-intensive sectors, and export facilitation.
- Diversification of Export Base
- Promote sunrise industries such as electronics, IT hardware, engineering goods, and green technologies to diversify the export basket.
- Strengthen domestic manufacturing capabilities to reduce dependence on imported critical intermediate inputs.
- Promote sunrise industries such as electronics, IT hardware, engineering goods, and green technologies to diversify the export basket.
- Strengthening Supply Chains
- Build resilient and efficient domestic supply chains in key sectors to lower import dependence and enhance export competitiveness.
- Build resilient and efficient domestic supply chains in key sectors to lower import dependence and enhance export competitiveness.
- Trade Policy Calibration
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Conclusion:
Although India is witnessing a widening trade deficit with its FTA partners, strong growth in electronics exports provides a positive signal. Strategic trade negotiations, targeted policy interventions, and sustained sectoral diversification will be crucial in turning the current trade imbalance into an opportunity for deeper and more sustainable global integration.
