India’s FTA strategy under strain as trade deficits widen

As India doubles down on freetrade agreements (FTA) with key bilateral partners, widening trade deficit with FTA-partner countries is worrying policymarkers in New Delhi. Niti Aayog, the government of India’s think tank and policy advisory arm, has flagged that the trade deficit with FTA partners ballooned by 59.2% y-o-y in 1H FY 2026 (Apr-Jun 2025), according to its Trade Watch report.

The pattern: Imports from these FTA-partner nations grew by 10% reaching USD 65.3 bn in 1H FY 2026, while Indian exports to the same countries contracted by 9% — falling to USD 38.7 bn, as per the report.

India’s widening trade deficit with its FTA partner countries is rooted in structural asymmetries rather than short-term demand shocks, Abhijit Mukhopadhyay, senior economist at Chintan Research Foundation, told EnterpriseAM. With a total of 26 FTA partners, many of India’s earlier FTAs were signed with partners where trade deficits already existed.

Take the case of UAE: The imbalance is being shaped by commodity-heavy trade rather than broad-based export strength. In FY 2025, India’s imports from the UAE stood at USD 62.2 bn, nearly double its exports of USD 35.1 bn, resulting in a deficit of roughly USD 27 bn.

India’s trade deficit with the UAE reflects weak diversification rather than a breakdown in the relationship, Ajay Srivastava, founder of the Global Trade Research Initiative, told EnterpriseAM. Trade is dominated by energy and precious metals, particularly gold and silver routed through Dubai as a trading hub, making much of the deficit artificial in origin. To move sustainably towards the USD 200 bn trade target by 2032, “both sides must pivot from commodity flows to a narrow set of high-potential manufactured goods and services.

Plugging the leak: While FTAs are meant to narrow such gaps through export growth, India’s experience has been the opposite. The trend shows India’s inability to scale labour-intensive and medium and small enterprise-heavy exports such as textiles, leather, gems, jewellery and chemicals, according to Mukhopadhyay.

Asian friends tense up: Exports to the Association of Southeast Asian Nations (Asean), India’s largest FTA partner until the recent EU pact, dropped a staggering 16.9%. Mukhopadhyay deems renegotiation of the Asean FTA “absolutely necessary” to undercut China’s dominance and intense price competition from economies like Singapore, Thailand, and Vietnam, which India has historically struggled to offset.

New Delhi is redirecting its trade diplomacy towards Europe and MENA. Newer trade pacts are increasingly being pursued with countries where India already runs small trade surpluses, rather than chronic deficits, Mukhopadhyay noted.

The Gulf opportunity: Greater trade liberalization with GCC nations could help rebalance India’s export mix, Mukhopadhyay said. This can be done by favoring labour-intensive sectors (manufacturing, engineering, autos, machinery) and services (IT, healthcare, education, construction) over input-dependent ones (petroleum, gems). As petroleum trade plateaus, Gulf exporters such as Saudi Arabia, the UAE and Iraq are likely to pivot towards petrochemicals, green fuels and downstream energy investments in India.

Rethinking templates: India needs to start looking away from broad, deeply liberalising FTAs towards calibrated preferential or sector-specific agreements, particularly with Middle Eastern and Latin American partners, suggests Mukhopadhyay.

Trade deficits are not inherently problematic if they deliver cheaper, high-quality inputs for domestic manufacturing, he said. “Where that condition is absent, future agreements need to approach with caution to avoid embedding long-term imbalances.”