NITI Aayog flags widening FTA trade deficit despite 18 active agreements.
Q1 FY26 FTA deficit rose 59% as imports jumped and exports fell.
Energy, machinery and intermediates drove imports from key FTA partners.
Weak export integration shows India lagging in global value chains.
India's policy think tank NITI Aayog has underlined a long-pending issue--the underutilisation of free trade agreements (FTAs)--in its latest quarterly trade watch report. In the last four years, India concluded FTAs with Mauritius, the United Arab Emirates, European Free Trade Association countries, Indo-Pacific Economic Framework members, the United Kingdom, Oman and New Zealand. It has brought the number of India's comprehensive FTAs to 18.
However, in Q1 FY26 (April–June 2025), imports from FTA countries jumped to $65.3bn, up 10% year-on-year, while exports fell to $38.7bn, down 9%. The result was a $26.7 bn trade deficit – about 59% higher than a year earlier.
1 January 2026
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In plain terms, India is buying much more from its FTA allies than it is selling to them. This lopsided pattern is not new. For example, in Q3 FY25 (Oct–Dec 2024) the FTA deficit was about $23.4 bn, and by Q4 FY25 (Jan–Mar 2025) it likely exceeded $30 bn. In short, every recent quarter has seen imports outrun exports, steadily widening the gap.
Reason Behind Imbalance
The data point to structural causes. On the import side, India remains heavily reliant on foreign energy, machinery and intermediate goods. The Trade Watch report notes that Q1 FY26 import growth was led by the (28.7%), South Asian FTA nations or SAFTA (33.6%), Japan (20.8%), Thailand (18.1%) and Singapore (14.1%).
Imports from Nepal also surged by 180.5%, albeit on a low base, while ASEAN registered moderate increases of 1.4%. In contrast, imports from Australia (-10.9%) and Bhutan (-86.6%) fell. In concrete terms, this means India is bringing in raw gold and jewellery from the UAE, industrial machinery and electronics components from Japan and Singapore, and fuels and chemicals. These are vital inputs for the Indian industry and consumers that our domestic market cannot fully supply.
By contrast, India’s exports to its FTA markets have stalled or even fallen. The largest FTA bloc – ASEAN – saw shipments from India fall 17% in Q1 FY26. It was led by steep declines to Malaysia, Singapore and Australia. In fact, exports to the UAE, the second-largest FTA market, also dipped. Only a few destinations registered gains, and in small niches, for example Bhutan and South Korea. Put simply, Indian firms have struggled to sell in these markets at high volumes. One exception is electronics: exports of computers and related goods jumped about 47%, reflecting some early success in a high-tech sector. But outside that bright spot, traditional export sectors are underperforming.
Commerce Minister Piyush Goyal, on multiple occasions, highlighted problems with the bloc in doing trades. India has been in talks with ASEAN to re-negotiate the terms of the trade agreement; however, the 2025 deadline was missed.
This pattern reflects textbook trade diversion. Tariff cuts under FTAs have made partner-country goods cheaper in India, so imports of inputs and fuels have surged. Meanwhile, comparable export gains have not materialised. NITI Aayog explicitly notes that demand recovery in this period “was skewed toward imported inputs and energy products” rather than export-oriented manufacturing.
In other words, India has opened the door wide for its FTA suppliers, who send in raw materials and components, but domestic manufacturers have not matched this by penetrating foreign value chains. The result is a one‐way flow: India buys heavily, but sells only modestly.
Part of the reason is India’s limited integration into global value chains. Despite signing many FTAs, Indian industry still sits low in the international production network. Most high‐demand goods and inputs are produced elsewhere, forcing India to import them. Even in sectors like automobiles, India’s firms make mostly end-products for the local market and import key parts. The Trade Watch notes that India’s “backward integration” has improved, but forward linkages remain limited.
Way Ahead
India must fine-tune its export push to match FTA opportunities. This could involve targeted incentives and promotion for exports to FTA markets – for example, focused trade missions and finance support for textiles or engineering goods specifically to ASEAN or Korea. Innovation hubs or export councils could be a way to align with bilateral agreements. In short, export incentives should follow where FTAs have a competitive edge, so firms can seize those openings.
