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Tariff uncertainties require a relook at direction and composition of India’s external trade.
In brief
- The top 10 export destinations and import sources account for more than half of India’s merchandise exports and imports, respectively.
- The US holds a predominant position in India’s services trade, with shares of 11.1% and 15.5% in its total services exports and imports, respectively.
- Strategies for India’s export market diversification and expansion of import sources could involve exploring more BRICS+ trade opportunities.
US is India’s top export destination accounting for nearly one-fifth of its total merchandise exports in FY25. China ranks fifth with a share of 3.3%. In terms of sources of merchandise imports, China tops the list with a share of 15.7% in FY25 with US being the fourth largest after Russia and the UAE. The share of Russia has increased sharply since FY22 largely attributable to the increased volume of crude oil imports. India’s trade strategy may include broadening the spectrum of destination countries for its exports as well as source countries for its imports so as to become less vulnerable to policy changes in destination and source countries.
The magnitude and balance of trade between India-China and India-US have evolved in opposite directions. India-China trade deficit with respect to goods has risen nearly 150 times from a level of US$(-) 0.67 billion in FY01 to US$(-)99.2 billion in FY25 led by an inordinate increase in growth of imports from China. On the other hand, the Indo-US trade balance with respect to goods has remained in surplus, increasing from US$6.3 billion in FY01 to US$40.8 billion in FY25, reflecting faster growth in exports to US vis-à-vis that in merchandise imports from US. In terms of magnitudes, China’s merchandise trade surplus with India was more than twice that of the US merchandise trade deficit with India in FY25.
Chart 1 shows that it was in the period after the 2008 global economic crisis that the merchandise trade surplus with the US and trade deficit with China increased inordinately until FY14 after which it marginally reduced. It appears that it is deficit with respect to China that gets translated into surplus with the US. This may be due mainly to India importing raw materials and intermediate goods from China, processing these in India for further value addition and then exporting these to the US. If, therefore, India’s exports to the US come down, it is possible that India’s imports from China may also decline to some extent. Unless exports of such commodities are diversified to markets similar to the US, such as the UK, Australia, Canada, and European countries, this interdependence may remain.
India’s services trade trends: key features
The US leads all major countries with a 13.0% share in total global services exports in 2024 (Chart 2A). China and India ranked fifth and eighth with shares of 5.0% and 4.2% respectively. India’s share has more than doubled from 1.9% in 2005. The US also accounts for the largest share in global service imports followed by China. India ranks ninth with a share of 3.3% in 2024 (Chart 2B). The share of the US and India in service imports is less than their share in service exports, implying that they run a surplus on the services account while China runs a deficit on this account.
Composition of Indo-US trade in goods and services
At the 2-digit HS code level, India’s key exports to the US are electrical machinery, including smartphones and photovoltaic cells. Next in order of importance are natural and cultured pearls and precious and semi-precious stones, including diamonds, followed by pharmaceutical products, and machinery and mechanical appliances. With respect to imports from the US, mineral fuels and oils were the highest with a share of 31.4% in FY25, although falling from 38.9% in FY22. These are followed by natural or cultured pearls, semi-precious stones, machinery and mechanical appliances, electrical equipment, aircraft, and medical and surgical instruments.
Table 2 juxtaposes the evolution of India’s share in the United States’ total services trade and the United States’ share in India’s total services trade. By 2024, India accounted for 3.6% of total US service exports, placing it at the ninth position amongst all US export destinations. Further, India is positioned seventh in terms of sources of US services imports with a share of 5.0% in 2024. On the other hand, the US share in India’s total services exports increased from 8.7% in 2005 to 11.1% in 2024. The corresponding share of US in India’s services imports increased from 8.7% to 15.5% over the same period indicating that India’s degree of dependence on the US as a source for services imports has increased faster than its dependence on the US as a service export destination. In fact, India’s services trade surplus with the US has narrowed significantly in recent years. In 2024, India posted a marginal deficit on the services trade account with the US.
In terms of composition, ‘telecommunications, computer, and IT’ alone constituted 40.5% of total service imports into the US from India in 2024 followed by ‘other business services’ (consultancy, accounting, legal services etc.), ‘travel’ and ‘transport’. In terms of share of US service exports to India, travel accounted for 56.3% in 2024 followed by charges for the use of intellectual property rights not indicated elsewhere, other business services, and financial services.
Composition of Indo-China trade
With respect to India’s merchandise exports to China, the largest share is accounted for by ores et. al. (13.6%), mineral fuels and oils etc. (8.9%) followed by organic chemicals (8.9%), and machinery and mechanical appliances (8.1%) in FY25. With respect to imports, nearly 33.5% comprise electrical machinery, 23% of machinery and mechanical appliances and 10% of organic chemicals in FY25.
We have information only for 2015 regarding the composition of India’s services trade with China. In 2015, the highest share of China’s service exports to India related to travel (38.6%) followed by transport (27.7%) and other business services (18.2%). In terms of China’s service imports from India, the largest share was transport (53.7%) followed by other business services (23.9%) and travel (13.5%).
Expanding size and reaching balance in Indo-US trade
Policymakers have indicated the India-US trade target of US$500 billion by 2030 covering both goods and services1 and a balance of trade on these accounts. This would require that India’s total goods and services exports and imports should reach US$250 billion each by 2030.
On the whole, these targets appear feasible within the framework of a suitable Free Trade Agreement. Maximum adjustments would be required in imports of goods, and in exports and imports of services from the US. In these three cases, we may need a CAGR of 20% each during the period 2024 to 2030.
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Summary
To increase merchandise imports from the US, India may need to substantially raise imports of crude, natural gas and defense goods. At the same time, diversifying export destinations and import sources may require expanding trade with BRICS+ countries.
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