India’s Trade Deficit Surges Amid Export Challenges

India’s trade deficit widened sharply in October 2025 to $21.8 billion. This marked a 141% increase from the same month in the previous year. The rise was driven mainly by a surge in imports and a marginal decline in exports. Despite this, India’s overall export performance remains resilient over the longer term. The trade deficit reflects complex factors including tariff impacts, sectoral shifts, and seasonal import trends.

About India’s Trade Deficit

A trade deficit occurs when a country’s imports exceed its exports. Recently, India’s deficit jumped from $9.05 billion to $21.8 billion. This was due to both an increase in imports and a slight fall in exports. Merchandise trade, rather than services, was the main contributor to this change. Imports rose sharply while exports shrank marginally, affecting the overall trade balance.

Export Performance and Sectoral Impact

India’s total exports fell by 0.7% in October 2025 to $72.9 billion. Merchandise exports dropped by 11.8% to $34.4 billion, while services exports grew by 11.9%. Over the April-October 2025 period, total exports grew 4.8%, supported mainly by services. The 50% tariffs imposed by the US on Indian goods hit merchandise exports hard, especially labour-intensive sectors like leather, gems, chemicals, and textiles. Exporters have tried to mitigate losses by offering discounts and diversifying markets, but the impact remains .

Impact of US Tariffs on Exports

US tariffs introduced in mid-2025 caused India’s merchandise exports to the US to shrink by 20.4% in September. However, October saw a 15.4% rebound from September levels, though exports remained 8.6% lower than the previous year. The tariffs mainly affected goods, not services, explaining the resilience in India’s services exports. Negotiations on a Bilateral Trade Agreement between India and the US resumed in October 2025, raising hopes for tariff relief.

Surge in Imports Driven by Gold and Silver

India’s imports rose nearly 15% to $94.7 billion in October 2025. Merchandise imports increased by 16.7%, led by a nearly 200% surge in gold imports to $14.7 billion. Silver imports also soared by 530%, though from a smaller base. The festival season falling entirely in October drove this demand. Gold imports had been subdued earlier in the year but the October spike pushed overall imports higher. Investors also view gold as a hedge against currency risks.

Outlook and Forecast

The Export Import Bank of India forecasts merchandise exports to reach $114.2 billion in the October-December quarter, a 5% year-on-year growth. The future depends on resolving US tariff issues and stabilising import demand. While gold and silver imports may moderate after October, some elevated demand might persist. The trade deficit is likely to remain under pressure until trade tensions ease and export growth strengthens.

Questions for UPSC:

1. Critically analyse the impact of trade tariffs on a developing country’s export sectors with suitable examples.
2. Explain the role of precious metals like gold in India’s import economy and its relation to cultural and economic factors.
3. What are the implications of a widening trade deficit on India’s macroeconomic stability and currency valuation? Discuss with relevant examples.
4. With reference to India-US trade relations, comment on the significance of Bilateral Trade Agreements in resolving trade disputes and promoting exports.

Answer Hints:

1. Critically analyse the impact of trade tariffs on a developing country’s export sectors with suitable examples.

1. Tariffs increase the cost of exported goods, reducing competitiveness in international markets.
2. Example – US 50% tariffs on Indian merchandise exports caused a 20.4% drop in exports to the US in Sept 2025.
3. Labour-intensive sectors like leather, gems, textiles faced export contraction due to tariffs.
4. Tariffs can force exporters to offer discounts, squeezing profit margins and sustainability.
5. Exporters attempt market diversification, but establishing new supply chains takes time, prolonging impact.
6. Services exports often remain unaffected if tariffs target goods, providing some resilience (e.g., India’s services exports grew 11.9%).

2. Explain the role of precious metals like gold in India’s import economy and its relation to cultural and economic factors.

1. Gold imports surged nearly 200% in Oct 2025 due to festival season demand (Dhanteras, Deepawali).
2. Culturally, gold is seen as auspicious and a preferred investment, driving consistent demand regardless of price.
3. Gold acts as a hedge against currency risk and inflation for Indian investors.
4. Silver imports also spiked (530%), though from a smaller base, reflecting similar cultural-economic dynamics.
5. Seasonal and festival timing influences gold import volumes, causing import volatility.
6. High gold imports contribute substantially to merchandise import growth and thus impact trade deficit.

3. What are the implications of a widening trade deficit on India’s macroeconomic stability and currency valuation? Discuss with relevant examples.

1. A widening trade deficit indicates higher imports than exports, increasing demand for foreign currency.
2. This can lead to depreciation pressure on the domestic currency (INR), affecting inflation and external debt servicing.
3. In Oct 2025, India’s trade deficit surged 141% to $21.8 billion, driven by import surge and export decline.
4. Persistent deficits may reduce foreign exchange reserves and increase vulnerability to external shocks.
5. However, strong services exports and remittances can partially offset merchandise trade deficits.
6. Policy measures like trade agreements or import substitution can help stabilize the deficit and currency.

4. With reference to India-US trade relations, comment on the significance of Bilateral Trade Agreements in resolving trade disputes and promoting exports.

1. BTAs provide a formal framework to negotiate tariff reductions and resolve trade disputes amicably.
2. India-US 50% tariffs on Indian goods caused export contraction, denoting need for negotiation.
3. Resumption of BTA talks in Oct 2025 signals willingness to ease tensions and restore trade flows.
4. BTAs can enhance market access, reduce non-tariff barriers, and boost export competitiveness.
5. Successful BTAs encourage investment, technology transfer, and deeper economic cooperation.
6. Timely resolution through BTAs can revive affected sectors and support sustained export growth.