India’s FTAs - Rising Trade Deficit Amid Structural Shift Towa...

India’s FTAs - Rising Trade Deficit Amid Structural Shift Towards Sunrise Exports

Jan. 7, 2026

Why in News?

At a time when India is fast-tracking Free Trade Agreement (FTA) negotiations to diversify exports and mitigate the impact of potential US tariffs, a recent NITI Aayog ‘Trade Watch Quarterly’ report highlights a paradox.
India’s trade deficit with FTA partners is widening sharply, even as sunrise sectors like electronics show strong global integration and export growth.

What’s in Today’s Article?

Key Findings of the NITI Aayog Report:

Rising trade deficit with FTA partners:
- India’s trade deficit with FTA partners rose 59.2% between April and June last year compared to the previous year as imports jumped by 10% to $65.3 billion and exports declined by 9% to $38.7 billion.
- This indicates asymmetric gains from FTAs and weak export competitiveness in traditional sectors.
India’s expanding FTA network:
- India has concluded FTAs with Oman, New Zealand and the UK in 2025 and is in active negotiations with the EU, the US, Australia, Bahrain, the GCC, the Eurasian Economic Union (EAEU), Canada and the Southern African Customs Union (SACU).
- New Delhi is also considering a Preferential Trade Agreement (PTA) with Brazil and Israel.
- This reflects India’s strategy of trade diversification and geopolitical hedging.
Structural divergence in export performance:
- Decline in traditional exports: Petroleum exports declined sharply, contributing to overall export contraction.
- Surge in sunrise industries:
  - Electronics emerged as the standout performer, rising 47% year-on-year, increasing its share to over 11% of total exports, reflecting deeper integration into global electronics supply chains.
  - This signals deeper integration into Global Value Chains (GVCs) and success of PLI schemes, Make in India, and China+1 strategy.
ASEAN factor - Key driver of trade deficit:

Exports to ASEAN fell by 16.9%, making it the largest contributor to export contraction.
Sharp declines witnessed with Malaysia (–39.7%), Singapore (–13.2%), and Australia (–10.9%).
India–ASEAN FTA renegotiation missed the end-2025 deadline.
Meanwhile, ASEAN–China signed an upgraded FTA, intensifying competitive pressures on Indian exports.

Mixed export trends across FTA partners:
- Marginal gains recorded with South Korea (+15.6%), Japan (+2.8%), Thailand (+2.9%), and Bhutan (+10.2%).
- UAE, India’s second-largest FTA export destination, saw a 2.1% dip.
Import concentration and surge:
- Top 7 import sources (China, UAE, Russia, USA, etc.) now account for 43% of total imports in Q1 FY26 (up from 39% in Q1 FY25), amounting to total imports from these countries to $76.7 billion.
- High import growth from UAE (+28.7%), China (+16.3%), USA (+16.9%), and Singapore (+14%).
Commodity-wise import trends:
- UAE: Surge driven by gold compounds (UAE becomes a top supplier, surpassing Japan), petroleum oils and bituminous minerals.
- China: Increase in electronics components under HS 85 - circuit boards (HS 851779), integrated circuits (HS 854239). This highlights India’s dependence on intermediate imports for electronics manufacturing.
- Russia, Iraq, Saudi Arabia: Import decline due to lower petroleum oil inflows. Iraq shows diversification into gaseous fuels, petroleum bitumen, and crude soybean oil.

Challenges Highlighted and Way Ahead:

Rising trade deficit with FTA partners: Recalibrate FTAs with a focus on rules of origin, market access for labour-intensive sectors, etc.
Export contraction to ASEAN: Strengthen export competitiveness through logistics reforms, technology upgradation, etc.
High import dependence on few countries: Reduce import dependency via domestic capacity-building in intermediates. Strategic trade diplomacy to counter ASEAN–China trade asymmetries.
Weak competitiveness in traditional sectors: Deepen GVC integration beyond electronics into EVs, semiconductors, green technologies, etc.

Conclusion:

The NITI Aayog report underscores a critical transition phase in India’s trade strategy.
While FTA-led trade deficits and ASEAN export contraction pose concerns, the robust rise of electronics exports reflects a positive structural shift.
The challenge lies in aligning FTAs with India’s manufacturing ambitions, ensuring reciprocal gains, and leveraging sunrise sectors to achieve sustainable, export-led growth.