Rebalancing India’s trade deficits

Rebalancing India’s trade deficits

D. K. Srivastava, Chief Policy Advisor, EY India
D. K. Srivastava

Chief Policy Advisor, EY India

5 minute read 28 Oct 2026
Related topics
Tax
Global tax reform
Global trade
Oil and gas
Supply-chain

India’s trade structure exposes it to policy and supply shifts in a few major economies.

In brief

  • India’s merchandise trade deficit widened to 8.6% of GDP in FY26, but a growing services surplus of 5.6% of GDP provided an important cushion to current account imbalance.
  • India’s bilateral merchandise trade is highly concentrated: the US dominates the surplus side, while China is the single largest source of deficit.
  • India’s trade with BRICS+ is distinctly import-heavy: merchandise imports from BRICS+ grew 8.1% annually (2015-25), more than twice the 3.8% corresponding growth in exports.

Profile of India’s current account imbalance

India’s current account balance reflects contrasting trends in merchandise and services trade. While India has consistently run a sizeable merchandise trade deficit, it has built a growing services trade surplus. Private transfers and income flows, together, on a net basis, provide a further offset, helping contain the overall current account deficit. Over FY01-26, India’s current account balance ranged from a deficit of 4.8% to a surplus of 2.3% of GDP, with the long-period average amounting to a deficit of 1.2% of GDP.

The merchandise-services divergence has become particularly pronounced in recent years. After falling to 3.8% of GDP in FY21 (Chart 1), the merchandise trade deficit widened to 8.6% in FY26. Over the same period, the services surplus strengthened substantially, rising from 3.4% of GDP in FY22 to 5.6% in FY26. As a result, services have become increasingly important in cushioning the effect of the merchandise trade deficit on India’s external balance.

Energy prices remain an important source of volatility. India’s merchandise trade deficits exceeded 10% of GDP in FY12 and FY13, when global crude oil prices averaged above US$100 per barrel. Conversely, the exceptional current account surplus years of FY02-FY04 and FY21 coincided with relatively low crude prices. India's external balance therefore reflects not only India’s export competitiveness but also its structural dependence on energy imports.

Balancing merchandise trade surpluses and deficits: country-wise profile

The aggregate merchandise deficit conceals a concentrated bilateral trade structure.

On the surplus side, the US is India's dominant market, accounting for 33.8% of the gross merchandise trade surplus with countries with whom India maintained a surplus in 2025 (Table 1). The Netherlands accounted for another 10.7%, followed by Bangladesh at 7.6%, Nepal at 4.4% and the UK and Spain at 3.5% each. The overall merchandise trade surplus with countries with whom India maintains a surplus grew at a CAGR of 7.1% between 2010 and 2025. India's trade surplus with the US is underpinned significantly by electronics, engineering goods and drugs and pharmaceuticals, while refined petroleum products, engineering goods and electronics have supported exports to the Netherlands.

There is even more pronounced concentration on the deficit side. India’s trade deficit with China alone accounted for 24.6% of India's merchandise deficit with countries with whom it maintained a deficit in 2025 (Table 1), followed by Russia at 12.6% and the UAE at 6.6%. Imports from China are concentrated in areas including electronics, machinery and chemicals, while India's deficits with Russia and the UAE are strongly influenced by petroleum crude and products.

These patterns expose India to different types of external risks. Heavy dependence on the US for generating trade surpluses increases exposure to changes in US trade policy, while reliance on China for important industrial inputs creates vulnerability to potential supply disruptions. India’s energy imports generate another concentration risk linked to global oil and gas markets and major energy-exporting economies. A more balanced trade strategy therefore needs to focus not simply on reducing the aggregate deficit but on reducing critical single-country and single-commodity dependencies.

Role of services in counterbalancing India’s net merchandise trade deficit

Services provide India with an important counterweight to the merchandise trade deficit. India's services trade surplus increased from US$38.14 billion in 2010 to US$209.57 billion in 2025 (Table 2). Bilateral services surpluses are prominent with the UK, the US, Germany and the Netherlands, although the surplus with the US declined from US$11.37 billion in 2021 to US$4.73 billion in 2025.

Services deficits, by comparison, are concentrated among a relatively small number of countries and are modest in magnitude. Ireland recorded the largest identified deficit at US$2.26 billion in 2025 attributable to its role as a global hub for selected activities including aircraft leasing, digital platforms, cloud computing, intellectual property and financial services.

Achieving a better trade balance profile

Improving India's trade profile should not imply eliminating all bilateral deficits. Imports of energy, technology and productive intermediate inputs remain important to domestic growth. The objective should instead be to reduce excessive concentration while expanding overall trade.

One route is greater diversification through BRICS+ trade. Between 2015 and 2025, India's merchandise exports to BRICS+ countries grew at a CAGR of only 3.8% (Table 3), compared with 8.1% growth in imports from them. In 2025, China accounted for 34.0% of India's merchandise imports from BRICS+ economies, the UAE 18.3% and Russia 16.1%. This asymmetry indicates scope to expand India's exports within the grouping, including to China.

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India's expanding network of bilateral and regional trade agreements offers another channel. Existing agreements and those signed, concluded or awaiting implementation can be used to diversify markets, improve market access and widen the country's export base. Local-currency settlement may complement this strategy where trade flows are sufficiently balanced and the required financial infrastructure is available. It cannot, however, substitute for export competitiveness or supply-chain resilience.
 

A country-specific rebalancing strategy may also be useful. Illustrative calibrations show how trade could expand while reducing unusually large bilateral imbalances. For the US, considering a scenario in which India's goods and services exports grow at 10% annually while imports grow at about 16%, India’s bilateral trade with the US increases to close to US$500 billion by 2031 while reducing India's present goods-and-services surplus to nearly half its 2025 level. This may be viewed as an illustrative medium-term rebalancing pathway rather than a forecast.
 

The strategic objective may therefore be to improve the composition and resilience of India's trade rather than mechanically eliminate deficits. Diversifying markets and supply chains, increasing domestic value addition, exploiting opportunities arising from BRICS+ and India's trade agreements, and developing higher-value exports can all contribute to this transition. Over time, a healthier balance with major trading partners, accompanied by an expanding overall volume of trade, would reduce external vulnerabilities while allowing India to retain access to energy, technology and other productive imports essential for growth.

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Summary

India's external trade shows large imbalance due to merchandise trade deficit which is partially offset by the growing services trade surplus, supplemented by net transfers and income. At the same time, the underlying pattern of India’s merchandise trade remains highly concentrated, with the US playing a dominant role on the surplus side and China, Russia and major energy suppliers accounting for significant deficits. There is thus a need to rebalance trade which may be accompanied by stronger domestic value addition, diversification of energy and other critical supply sources and continued expansion of services exports. 

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About this article

D. K. Srivastava, Chief Policy Advisor, EY India
D. K. Srivastava
Chief Policy Advisor, EY India
A noted economist, D.K. Srivastava is an Honorary Professor at Madras School of Economics and Member of the Advisory Council to the 15th and 16th Finance Commissions.
Related topics
Tax
Global tax reform
Global trade
Oil and gas
Supply-chain

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