Foreign Trade of India

The balance of trade

• The balance of trade is exports minus imports of goods.
• It shows whether a country sells more goods abroad than it buys.
• Exports bring foreign money in. Imports send money out.
• India reports the goods balance and the services balance separately.

What India sells and buys

• Major exports: petroleum products, gems and jewellery, pharmaceuticals and software.
• Major imports: crude oil, electronics and gold.
• Crude oil and gold are so big that the goods bill usually beats export earnings.
• Rising electronics imports add to the gap.
• India has run a goods trade deficit in most years.
• The deficit is structural, not seasonal. What matters is how it is financed.

One record for every dealing with the world

• The Balance of Payments (BoP) records all economic dealings between India and the rest of the world.
• It is wider than trade. It adds services, investment and remittances.
• A BoP surplus means the country is gaining foreign exchange. A deficit means it is losing some.

Current account and capital account

• The current account tracks trade in goods and services, plus income and transfers.
• The capital account tracks investment flows, like FDI and portfolio money.
• Both together make up the BoP.
• A services surplus can offset a goods deficit inside the current account.
• Learn which item sits in which account. Exams test this directly.

A picture to hold on to

• India sells software services abroad. That is a services credit in the current account.
• A foreign company builds a factory in India. That is an FDI inflow in the capital account.
• Both bring foreign money in. Only the first counts as everyday trade.

A cushion against shocks

• Foreign exchange reserves are foreign currency assets held mainly by the central bank.
• They cushion shocks.
• They pay for imports when export earnings fall short.
• India’s reserves fell dangerously low just before the 1991 reforms.
• Today they are huge and cover many months of imports.
• Import cover is the number of months of imports the reserves can pay for. It is a classic exam term.

Two very different kinds of foreign money

• FDI is a lasting stake in a business, like a factory.
• FPI is buying shares or bonds without direct control.
• FDI is stable and hard to pull out.
• FPI can move in and out quickly.

How big is FDI?

• Total FDI inflows reached $58.85 billion in FY 2025-26. That is up 18% from the year before.
• Since April 2000, cumulative FDI into India has crossed $1.16 trillion.
• Singapore is the largest source. It sent $19.8 billion in FY 2025-26 and $194.7 billion since 2000.
• Mauritius follows with $186.8 billion cumulatively.
• The USA has put in $81.8 billion cumulatively.
• Technology led the sectors in FY 2025-26 at $13.9 billion. That is nearly double the year before.
• Services drew another $10 billion. These include financial services, banking, insurance and outsourcing.

A policy shift in insurance

• Union Budget 2025 raised the FDI cap in insurance from 74% to 100%.
• For the first time, a foreign insurer can fully own an Indian insurance company.

When is a current account deficit dangerous?

• A current account deficit is not automatically a crisis.
• It turns dangerous mainly when short-term, easily reversed money pays for it.
• Long-term FDI is stable. Short-term portfolio money can flee overnight.
• So a deficit funded by FPI is riskier than one funded by FDI.
• Exams test how the deficit is financed, not only how big it is.
• Read more: Foreign Direct Investment.

Services and remittances

• India’s services surplus, led by IT exports, offsets part of the goods deficit.
• Remittances are money sent home by Indians working abroad.
• They are a large and steady source of foreign exchange.
• In some years they even exceed FDI inflows.
• Both keep the current account softer and the rupee better supported.

The dependence side

• India still depends on imports for crude oil, electronics and gold.
• A jump in oil or gold prices can widen the deficit and press on the rupee.
• Selling to many markets spreads the risk but does not remove it.
• Policy tries to push manufactured exports and cut import dependence.
• Trade dependence links straight to inflation, the rupee and the current account.

What changed after 1991

• Before 1991, India protected local industry with high tariffs and licences.
• This was an import-substitution policy.
• The aim was to build home industry behind a wall of tariffs.
• After 1991, policy moved to export promotion and openness.
• Tariffs fell and trade opened up.
• Firms now faced global competition.
• The 1991 shift is the dividing line in India’s trade history.

The WTO

• The World Trade Organization (WTO) sets global rules on tariffs and trade disputes.
• It gives members predictable rules for trading and for settling fights.
• India negotiates bilaterally and within the WTO.
• Imagine a country bans Indian steel for no valid reason.
• India can take the matter to a WTO panel instead of hitting back alone.
• The WTO exists so that rules, not raw power, settle trade fights.
• Read more: Export Promotion Mission (EPM), Export-Import Bank of India (EXIM Bank) and Cross-border E-Commerce Export Framework.

Exports and the deficit

• August 2026 merchandise exports rose 26.12% year on year to $43.81 billion.
• Imports rose 14.05% to $70.67 billion.
• The monthly trade deficit narrowed to $26.86 billion.
• (Source: PIB, India’s Foreign Trade, April-August 2026-27.)

Forex reserves

• In the week to 21 August 2026, forex reserves rose to about $729.33 billion.
• That was a jump of $12.42 billion in one week.
• Foreign currency assets stood at $591.33 billion.
• Gold reserves stood at $114.22 billion.
• This buffer cushions the currency even with FPI outflows and a large goods deficit.
• (Source: RBI, Weekly Statistical Supplement, 21 August 2026.)