The latest trade numbers for FY26 till February offer contrasting insights on India’s performance vis-à-vis its two biggest partners, China and the US, which together account for a quarter of its trade with the world. If one focuses on exports, the good news is that China has become our third-largest destination, rapidly expanding year-on-year (y-o-y) by 37.7% while India’s overall exports were up by only 1.84%. The most important destination—the US, however, is showing signs of flagging as our exports to that country were up by only 3.84%. No doubt, the higher growth in India’s exports to the dragon reflects a low base but there are welcome signs of change from the stereotypical pattern of India exporting mainly raw materials like iron ore and intermediates for plastics while importing manufactured goods.
Dragon Pivot
Now there are higher shipments of electrical machinery, equipment and parts thereof which were up four-fold and accounted for 17% of our total exports, besides marine products. There are prospects for an additional $6 billion of exports if a reverse-trade model for drugs kicks in, whereby India imports bulk drugs, converts them to finished dosage forms and exports these back to China.
Trump Factor
The bad news is the adverse impact of the tariff disruption of US President Donald Trump and uncertainties over a trade deal on India’s shipments to the US. This fiscal, India’s exports saw a y-o-y decline of 12.6% in September—the first month when 50% tariffs kicked in—and 8.6% in October. There was a sharp surge to 22.6% in November that reflected a quick clearing of backlog orders and a survival strategy to hang on to long-term customers even while facing squeezed margins and minor losses. The monthly contraction in shipments resumed thereafter.
In early February, India and the US announced an agreement that brought down tariffs from 50% to 18%. Shortly afterwards, Trump’s tariffs were invalidated by the US Supreme Court. The dismal prospects for our exports to the US will persist as Trump has imposed a 150-day uniform tariff of 10% and the United States Trade Representative has launched investigations under Section 301 of Trade Act of 1974 for India and several other countries. For such reasons, India has stated that it will await the new tariff architecture before signing any trade deal with the US.
Looking ahead, the data for FY 2026 till February underscores the imperative of export diversification to boost India’s dismal performance. The government, for its part, must implement appropriate export promotion measures as there are adverse headwinds with the intensifying West Asian conflict which will most certainly be reflected in the March numbers.
Trade diversification through free trade agreements (FTAs) is certainly efficacious in this regard. Currently, negotiations are underway to broaden the existing trade deal with Australia and Sri Lanka. Talks are also on for FTAs with Israel, Peru, Chile and the Eurasian Economic Union. Above all, India must engage more closely with China and the US. The decision to make it easier for the dragon’s investments in India are bound to result in greater two-way trade flows.
Integration with Chinese supply chains will also boost India’s exports to the mainland. Despite all the imponderables of Trump’s tariff agenda, India must keep engaging with the US to keep the trade deal on track to restore buoyancy in our shipments to our most important destination.