India’s goods trade deficit is projected to widen to USD 300 billion in FY26, up from USD 287 billion in FY25, driven by sluggish export growth and robust import demand fueled by strong domestic consumption. According to a report by ICICI Bank Global Markets, weak global demand, particularly from non-US markets, is hampering merchandise exports, while India’s resilient domestic economy continues to drive imports, especially in energy, electronics, and capital goods. This article delves into the factors contributing to the widening trade deficit, its implications for India’s economy, and potential strategies to address the challenges posed by global trade uncertainties.
The Widening Trade Deficit: A Closer Look
India’s goods trade deficit, the gap between the value of imports and exports, has been a persistent challenge for the economy. In FY25, the deficit reached USD 287 billion, up from USD 245 billion in FY24, reflecting a 6.2% increase in imports. For FY26, ICICI Bank Global Markets forecasts the deficit to hit USD 300 billion, equivalent to approximately 7.0% of India’s GDP. This widening gap is driven by a combination of external and internal factors, with tepid export growth and strong import demand at the core.
Trade Data Snapshot
Recent trade data provides context for the projected increase:
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June 2025 Performance: India’s goods trade deficit narrowed to a four-month low of USD 18.8 billion in June 2025, down from USD 21.9 billion in May. This improvement was driven by a lower non-oil, non-gold deficit of USD 7.8 billion (compared to USD 10.2 billion in May), while the oil deficit remained stable at USD 9.2 billion. On a year-on-year (YoY) basis, the June 2025 deficit was lower than the USD 20.8 billion recorded in June 2024.
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Export Trends: India’s merchandise exports in June 2025 saw a marginal contraction of 0.1% YoY, reaching USD 35.1 billion. This decline was primarily due to a 16% YoY drop in oil exports, although non-oil exports grew by 2.9% YoY, led by electronics, chemicals, and engineering goods. Exports to the US performed strongly, growing by 24% YoY in June and 22% YoY in the first quarter of FY26 (Q1FY26). However, exports to non-US markets fell by 5.6% YoY in June and 2.7% YoY in Q1FY26, reflecting weaker global demand and lower oil exports.
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Import Trends: Imports in November 2025 surged to USD 64.95 billion, contributing to a widened trade deficit of USD 32.84 billion, up from USD 27.1 billion in October. Strong domestic demand for energy, electronics, and capital goods has sustained high import volumes, despite a USD 5 billion downward revision in gold imports for November.
Factors Driving the Trade Deficit
Several factors are contributing to the projected widening of India’s goods trade deficit in FY26:
1. Tepid Export Growth
Global demand weakness, particularly in non-US markets, is a major hurdle for India’s merchandise exports. The ICICI Bank report highlights that exports to key non-US regions have failed to gain momentum, with a 5.6% YoY decline in June 2025 and a 2.7% YoY drop in Q1FY26. Lower oil exports, down 16% YoY in June, have further dragged down overall export performance. While electronics exports remain a bright spot, the lack of diversified demand from markets outside the US limits growth.
2. Robust Domestic Consumption
India’s strong domestic economy is fueling import demand, particularly for energy (e.g., crude oil), electronics, and capital goods. The resilience of domestic consumption, supported by steady economic growth, has kept import volumes high. This imbalance between sluggish exports and strong imports is a key driver of the widening trade deficit. The report notes that even with stable oil prices, non-oil imports are expected to remain robust, exacerbating the gap.
3. Global Trade Uncertainties
Uncertainties surrounding US trade and tariff policies are expected to have a deeper impact on global trade flows in 2025 compared to the 2018-19 trade war. A 90-day pause on reciprocal tariffs announced by former President Donald Trump allowed some trade flows to resume, but recent announcements of fresh tariffs on 25 countries have reignited concerns. These tariffs could further dampen global demand, particularly affecting India’s non-US exports. However, the ICICI Bank report suggests that higher tariffs on regional peers could provide India an opportunity to expand its market share in the US for selected goods.
4. Structural Challenges
India’s trade deficit is also influenced by structural factors, including:
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Sub-optimal Manufacturing Growth: The manufacturing sector’s slow growth limits export competitiveness.
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High Logistics Costs: Elevated logistics costs reduce India’s ability to compete in global markets.
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Infrastructure Bottlenecks: Inadequate infrastructure hampers export efficiency and increases costs.
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Reliance on Imported Inputs: Dependence on imported crude oil, pharmaceutical ingredients, and consumer durables drives up import bills.
Implications for India’s Economy
The widening goods trade deficit has significant implications for India’s economic landscape:
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Current Account Deficit (CAD): Despite the growing goods trade deficit, steady inflows from services exports and remittances are expected to limit India’s CAD to USD 30 billion in FY26, or 0.7% of GDP, compared to an estimated 0.9% in FY25. The services trade surplus, which stood at USD 17.8 billion in April 2025, provides some relief, but slower growth in services exports due to weaker US demand could pose risks.
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Credit Rating and Borrowing Costs: A sustained widening of the CAD could adversely affect India’s credit rating, potentially raising borrowing costs for the government and businesses.
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Rupee Pressure: A larger trade deficit may put downward pressure on the Indian rupee, especially if US tariffs reduce export earnings. The Global Trade Research Initiative (GTRI) has warned that US remittance tax plans could further impact Indian households and the rupee.
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Economic Resilience: Despite global trade challenges, India’s external position remains relatively strong, supported by improving foreign portfolio investment (FPI) and foreign direct investment (FDI) inflows. The domestic growth cycle is expected to drive investment, mitigating some external pressures.
Opportunities Amid Challenges
While the widening trade deficit poses challenges, it also presents opportunities:
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US Market Share: Higher US tariffs on regional competitors could allow India to expand its market share in the US for goods like electronics, chemicals, and engineering products.
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Services Exports: India’s strong services sector, particularly in IT and software, continues to offset the goods trade deficit. Maintaining this surplus is critical for economic stability.
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Bilateral Trade Partnerships: India’s growing trade ties with Japan, with bilateral trade reaching USD 25 billion in FY25 at a 13% CAGR, signal potential for diversified export markets. Automobiles now account for 13% of India’s exports to Japan, up from 1% four years ago.
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Domestic Reforms: Addressing structural issues like logistics costs and manufacturing growth could boost export competitiveness.
Strategies to Mitigate the Trade Deficit
To address the widening trade deficit, India can adopt the following strategies:
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Diversify Export Markets: Reducing reliance on the US by targeting emerging markets in Africa, Latin America, and Southeast Asia could offset weak demand from non-US regions.
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Boost Manufacturing: Initiatives like the Production Linked Incentive (PLI) scheme can enhance manufacturing in sectors like electronics and pharmaceuticals, reducing import dependence and boosting exports.
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Improve Logistics: Investments in infrastructure and logistics, such as those under the PM Gati Shakti initiative, can lower costs and improve export efficiency.
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Leverage FTAs: Optimal utilization of Free Trade Agreements (FTAs) can open new markets and reduce trade barriers.
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Promote Non-Oil Exports: Continued focus on high-growth sectors like electronics, chemicals, and engineering goods can drive export growth.
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Manage Import Demand: Encouraging domestic production of critical inputs like crude oil derivatives and electronics components can reduce import reliance.
India’s goods trade deficit is projected to widen to USD 300 billion in FY26, driven by tepid export growth and strong import demand fueled by robust domestic consumption. While global trade uncertainties, particularly US tariff policies, pose challenges, India’s resilient domestic economy and strong services sector provide a buffer. By diversifying export markets, boosting manufacturing, and addressing structural bottlenecks, India can mitigate the impact of the widening deficit and strengthen its external position. The road ahead requires strategic reforms to balance trade dynamics and sustain India’s growth trajectory as it aims to become the world’s fourth-largest economy in 2025.
