India’s goods trade in February saw its steepest decline in nearly two years. Exports fell by 10.9% to $36.91 billion, while imports dropped 16.3% to $50.96 billion, resulting in the smallest trade deficit in over three years (42 months) at $14 billion. While a shrinking trade deficit driven by rising exports would have been a positive development, the simultaneous decline in exports and imports is a cause for concern. Experts partly attribute this narrowing deficit to a high base effect, as exports in February last year, a leap year, stood at $41.4 billion and imports at $60.92 billion. However, exporters also report a trend of American importers holding back on orders, fearing the reciprocal tariffs set to take effect on April 2, as announced by U.S. President Donald Trump on February 13. This announcement came just before his meeting with Prime Minister Narendra Modi, where they unveiled an ambitious plan to boost bilateral trade to $500 billion by 2030 and finalise a free trade agreement (BTA) in the months ahead. Despite Commerce Minister Piyush Goyal’s diplomatic outreach to U.S. Commerce Secretary Howard Lutnick this month, discussions yielded little beyond a commitment to continue BTA negotiations. The looming threat of reciprocal tariffs has unsettled Indian exporters, as the U.S. is India’s second-largest trading partner, accounting for $118.3 billion in trade last fiscal year. It is also the only country among India’s top five trading partners with which India enjoys a trade surplus.

Imports also declined sharply, led by a 62% plunge in gold imports compared to last February. This drop is linked to domestic gold prices surging to ₹87,886 per 10 grams last week, dampening consumer demand. Oil imports also fell nearly 30% as India diversified its supply sources in response to additional U.S. sanctions on Russian oil producers and tankers in early January. By mid-2023, Russia accounted for over 40% of India’s crude imports, a significant increase from less than 1% before western sanctions on Moscow following its 2022 invasion of Ukraine. If Washington moves to neutralise its trade deficit with New Delhi, India could face a 15% widening in its overall trade deficit, based on last fiscal year’s $241 billion shortfall. India must diversify its goods and services trade to reduce its heavy reliance on the U.S. Two potential markets are China and the U.K. While imports from China have contributed to about a third of India’s trade deficit for over five years, India’s trade imbalance with the U.K. accounted for less than 3% of its total deficit last fiscal year. The free trade agreement negotiations with the U.K. are an opportunity for India to shift this balance in its favour.