India’s Widening Trade Deficit: A Concerning Factor for Economy?

In January, India's trade deficit widened to $22.9bn from $21.94bn a month earlier. The widening trade deficit was driven by higher import costs due to the falling rupee, while exports shrank amid weaker global demand.

India's trade deficit stood at $16.5bn a year ago and exports also shrunk by 2.4% year-on-year to $36.43bn in January. Meanwhile, India's value of imports spiked by 10% to $59.4bn during the period.

A trade deficit in a country occurs when a country buys more than it sells. It means it has higher imports than exports. In the first nine months of the fiscal year 2024-25, India's exports grew by 1.6% to $321.71bn, while imports increased by 5.15% to $532.48bn, widening the trade deficit to $210.77bn from $189.74bn in the same period a year ago.

What’s Driving the Deficit?

India's current trade imbalance is highly fueled by high imports in sectors like electronics, machinery, and crude oil.

A key structural challenge is India's weak manufacturing base. According to the World Bank database, India's share of manufacturing in the gross domestic product (GDP) was 13% in 2023—lower than even Bangladesh, Sri Lanka and Pakistan.

Ajay Sahai, director general, of the Federation of Indian Export Organisations also pointed out that without a stronger manufacturing sector, India’s exports will struggle to remain sustainable, according to a report by The New Indian Express.

Is Trade Deficit Always Bad?

A trade deficit isn’t always detrimental. According to the World Economic Forum (WEF), trade deficits do not necessarily indicate unfair trade policies and aren’t a direct cause of job losses in local manufacturing. It argued that protectionist policies could worsen inflation and slow economic growth. Instead, the World Trade Organization (WTO) suggests diversifying global supply chains for more stability.

An International Monetary Fund (IMF) report highlighted that if the deficit reflects an excess of imports over exports, it could be indicative of competitiveness issues. However, since the current account deficit also implies an excess of investment over savings, it may be pointing to a highly productive and growing economy as well.

“We need to look at the ability of the economy to finance this deficit either through foreign investments or remittances,” says Ranen Banerjee , partner and leader economic advisory at PwC India.

“In that light, India's attempts to join the global manufacturing value chain are welcome. The early results can be seen from the growing shipments of mobile phones that got a leg up from the production-linked incentives for the industry,” he adds.

When Trade Deficit Becomes a Problem?

Experts argue that importing essential goods like oil, electronics and machinery supports industrial growth and consumer demand. These items are also essential for a developing economy for infrastructure development and technological advancement. However, if the country has to import most of the goods to feed the consumption demand, then it could be a problem.

“A deficit driven by capital goods and intermediate products—such as electronics and machinery—signals robust industrialisation and infrastructure expansion. However, a high share of oil imports, which is around 31% of total imports, reflects energy dependency, exposing the economy to global price shocks,” says Ayush Patodia, associate vice president at Avalon Consulting .

A widening trade deficit tends to directly affect India’s foreign exchange reserves,  increasing the need for foreign currency to cover imports. High reserves help in stablising the rupee and managing external debt obligations.

Trade deficit affects the domestic currency too. A high deficit can lead to depreciation, as more rupees are required to buy foreign currency for imports. This relationship also affects the balance of payments.

India’s Balancing Act

India’s trade balance includes both goods and services. While it runs a deficit in goods trade, it holds a strong place in services exports. It helps to offset some of the shortfall.

A trade deficit alone isn't a red flag, but when driven by insufficient domestic production, it signals structural challenges that could escalate into a debt burden, which eventually can affect the country’s financial stability.

Patodia points out that as manufacturing’s share of India’s GDP remains stagnant at 17%, reducing the trade deficit largely hinges on enhancing domestic manufacturing as well.