Trade Deficit

Syllabus Areas:

GS III - Economy

India’s trade deficit surged sharply in October 2025, rising 141% to $21.8 billion, bringing the issue into focus. The spike—driven mainly by a sudden jump in gold and silver imports and a dip in merchandise exports due to US tariffs—has raised concerns about external sector pressures.

Trade Deficit:

A trade deficit occurs when a country’s imports exceed its exports during a given period. In simple terms, more foreign goods and services are being bought than sold. This results in a negative trade balance, indicating net outflow of foreign exchange from the country.

Trade Deficit Surge — What Happened?

  • India’s trade deficit jumped 141% in October 2025 to $21.8 billion (from $9.05 billion a year earlier).
  • Deficit widened because imports surged sharply, and exports shrank slightly.
  • The primary driver of this deterioration was merchandise trade, not services.

Export Performance — Mixed Signals

Monthly (October 2025)

  • Total exports shrank by 0.7% to $72.9 billion.
  • Merchandise exports fell sharply by 11.8% to $34.4 billion — the drag factor.
  • Services exports grew 11.9%, showing resilience.

Longer-Term (April–October 2025)

  • Total exports grew 4.8% over the period — indicating stability beyond the October dip.
  • Merchandise exports grew 0.6% overall despite the October slump.
  • Services exports grew 9.75%, providing most of the export momentum.

Record Performance

  • India recorded the highest-ever exports in Q1 and Q2 of FY2025–26.
  • Led primarily by strong services exports (IT, consulting, financial and business services).

Impact of US Tariffs

  • The 50% US tariffs apply only on merchandise, not services.
  • Merchandise exports to the US fell 20.4% in September 2025, the first full month under tariffs.
  • Exports to US have been shrinking since June 2025.
  • October 2025 saw a 15.4% monthly rebound due to:
    • Indian exporters offering discounts to retain US clients.
    • Diversification of customer base within the US.
  • But YoY, exports to the US in October were still 8.6% lower, showing the structural pressure from tariffs.
  • Overall: Tariffs remain a strong headwind, unsustainable for exporters to absorb for long.

Sectors Hurt the Most (Labour-Intensive)

Major contraction in October 2025 seen in:

  • Gems & jewellery: –29.5%
  • Chemicals (organic + inorganic): –21%
  • Engineering goods: –16.7%
  • Leather & leather products: –15.7%
  • Cotton yarn: –13.3%
  • Man-made yarn: –11.8%
  • Jute: –27.8%
    These are sectors where US is a key importer, hence tariffs hit them directly.

Why Imports Surged

Overall Imports

  • Total imports: up 15% to $94.7 billion in October 2025.
  • Merchandise imports: up 16.7% — major reason for the deficit.
  • Services imports: grew only 8.1%.

Gold Imports:

  • Gold imports surged nearly 200% to $14.7 billion (up from $4.9 billion).
  • Reason: Festive season (Dhanteras + Diwali) fell entirely in October 2025.
  • Culturally, gold demand spikes regardless of price.
  • The jump reversed an earlier trend:
    • April–September gold imports were 7% lower YoY despite higher gold prices.
  • But due to October spike:
    • April–October gold imports became 4% higher YoY.

Silver Imports

  • Silver imports rose 530% to $2.7 billion — though on a small base.

Was October an Outlier?

Exports Outlook

  • As long as tariffs remain, merchandise exports will stay under pressure.
  • But India–US trade tensions are easing:
    • Sixth round of BTA (Bilateral Trade Agreement) negotiations concluded in October.
    • First tranche of BTA could be signed soon.
    • If tariffs are addressed, export momentum can revive.

Imports Outlook

  • Gold and silver imports unlikely to remain at October’s extreme levels.
  • But elevated gold buying may persist due to:
    • Gold being used as a hedge against currency risk by investors.
Trade Deficit

Forecast — What Lies Ahead?

  • Exim Bank projects merchandise exports at $114.2 billion for Oct–Dec 2025
  • This represents 5% YoY growth — moderate but positive.
  • Indicates exports may stabilise assuming global demand stays stable and tariff tensions ease.

Prelims QUestions:

1. Consider the following statements regarding India’s trade deficit in October 2025:
  1. The sharp rise in trade deficit was primarily driven by a surge in gold and silver imports.
  2. Services exports contracted significantly, contributing to the widening deficit.
  3. Merchandise exports declined in October 2025.
Which of the above statements are correct?
  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3
2. Which of the following sectors were most adversely affected by the 50% US tariffs on Indian merchandise exports?
  1. Gems and jewellery
  2. Leather products
  3. Jute
  4. IT and professional services
Select the correct answer:
  1. 1, 2 and 3 only
  2. 1 and 4 only
  3. 2 and 4 only
  4. 1, 2, 3 and 4
3. With reference to India’s export performance in April–October 2025, consider the following statements:
  1. Total exports showed positive growth over the period.
  2. Services exports grew faster than merchandise exports.
  3. Merchandise exports recorded negative growth for the April–October period.
Which of the statements are correct?
  1. 1 and 2 only
  2. 2 and 3 only
  3. 1 and 3 only
  4. 1, 2 and 3