India's trade crossroads: Navigating global headwinds, building resilience

India’s trade report for October this year is a reminder that even fast-growing economies face external shocks that test both resilience and vulnerability. The month delivered a record trade deficit in merchandise of $41.7 billion, driven by a 200 per cent surge in gold imports and a steep 37.5 per cent drop in exports to the United States (US) after tariffs jumped from 10 per cent to 50 per cent in six months. 

Yet the broader picture is not of an economy veering into crisis. Growth remains steady at 6-7 per cent, the inflation rate has cooled to an all-time low of 0.25 per cent, and the current account deficit at 1.2 per cent of gross domestic product (GDP) sits comfortably within the 1-3 per cent emerging-market benchmark and below the European Union (EU) and US levels. The challenge is not reversal but recalibration: India must redesign its external strategy even as domestic engines stay strong. 

Three simultaneous shocks 

India is navigating three overlapping pressures. 

First, gold imports surged nearly 200 per cent year-on-year, not only due to festival demand but also because households’ use of gold as a cushion against inflation, currency risks, and global uncertainty. Unlike Singapore, which operates a major gold-trading hub without importing the physical metal, India still relies on bullion, underscoring an opportunity to deepen financialisation. 

Second, the sharp escalation of US tariffs has eroded export competitiveness in textile, engineering goods, and gems and jewellery — the sectors heavily dependent on American buyers. These traditionally strong categories contracted 11-16 per cent in a single quarter, reflecting the risk of excessive market concentration. While Vietnam, Mexico, and Bangladesh diversified export ties over the past decade, India remains overexposed to one destination. 

Third, capital flows diverged sharply. Foreign direct investment (FDI) rose to $81 billion, signalling long-term confidence, while foreign institutional investors (FIIs) withdrew $24 billion, pushing the rupee to record lows. Similar episodes in Brazil and Turkey show how volatile portfolio flows can magnify vulnerabilities even amid solid fundamentals. For India, the message is clear: Sentiment can shift abruptly. 

Together, these shocks highlight a system strong enough to attract long-horizon bets yet still exposed to sudden policy shifts, geopolitics, and swings in the investor’s mood. 

The hidden stabilisers 

Two buffers prevented the turbulence from mutating into systemic risk. 

First, services exports surged 11.9 per cent to reach $38.5 billion, offsetting nearly half the merchandise trade deficit. India’s information technology, telecom, artificial-intelligence operations, cloud services, and professional consulting are now producing value-added exports with greater resilience than traditional goods. Unlike manufacturing exports, these sectors remain less exposed to tariff wars, freight volatility, and supply-chain disruption. 

Second, remittances rose to an estimated $135 billion, equivalent to 3.5 per cent of GDP, surpassing earnings from several traditional export categories. With nearly 28 per cent of remittances now originating in the US and a rising share from countries of the Organisation of Economic Cooperation and Development, India’s diaspora-driven flows have structurally upgraded from low-wage remittances to high-skilled, counter-cyclical capital. In effect, these remittances function like a distributed, people-powered sovereign wealth fund that remains stable even during global downturns. 

Collectively, these stabilisers ensured that the current account deficit remained contained at 1.2 per cent of GDP — comfortably wit­h­in sustainable thres­holds, and underscored that India’s economic resilience is increasingly roo­ted in diversified stren­gths rather than cyclical luck. 

The disinflationary dividend 

The surprise gift: The retail inflation rate plunged to 0.25 per cent in October as global commodity prices softened and domestic supply constraints eased. This has allowed the Reserve Bank of India to deliver 100 basis points of cumulative rate cuts without fuelling price instability. But low inflation also narrows the cushion against imported inflation if the rupee weakens further or if geopolitical risks resurface in oil markets. India must, therefore, use this window strategically, not complacently. 

Key strategic imperatives 

Looking ahead, India must act decisively on five strategic imperatives to strengthen its external resilience and convert current turbulence into a long-term competitive advantage. 

First, export diversification has become an urgent priority, as overdependence on the US now constitutes a structural vulnerability rather than a strategic anchor. India must accelerate pragmatic, commercially meaningful free-trade agreements with Southeast Asian countries, the EU, and African nations, focusing not on abandoning existing markets but on building new pillars of market depth. 

Second, India’s cultural affinity for gold need not translate into unsustainable import bills. Expanding sovereign gold bo­nds, monetisation schemes, digital gold, and exchange-traded gold instruments can shift household demand away from bul­lion. Singapore and Dubai offer replicable models where financialised gold mar­kets thrive with minimal physical inflow. 

Third, the services sector, now arguably India’s most powerful comparative advantage, requires policy prioritisation matching its strategic importance. Global capability centres, health care tourism, fintech, legal and consulting services, and cross-border education can become trillion-dollar export engines if supported with globally benchmarked infrastructure, branding, and incentives on a par with production-linked manufacturing schemes. 

Fourth, remittances must evolve from passive inflows into strategic capital. Bilateral labour-mobility agreements, modelled on Canada’s point-based system or Portugal’s skill-based treaties, could cement India’s role as both a skill hub and a global labour participant. 

Finally, the momentum in electronics, 19 per cent year-on-year export growth despite tariff volatility, demonstrates that when incentives intersect with value-chain orchestration, industrial outcomes follow. Extending this discipline to specialty chemicals, defence, renewables, and pharmaceuticals will enable India to move from assembly-based exports to value-added, intellectual-property-driven output similar to South Korea’s post-chaebol technological leap. 

Collectively, these imperatives represent a shift from reactive fire-fighting to proactive competitiveness, aligning India’s trade strategy with its ambition to become a diversified, innovation-led global economic power. 

The strategic choice 

India stands at a policy crossroads: Turn inward with defensive protectionism or embrace bold structural change. Its core strengths — demographics, digital infrastructure, institutional stability and strong domestic demand — remain intact. Turbulence in October exposed vulnerabilities but also highlighted buffers that few emerging markets possess. History shows economies often leap forward in moments of stress: South Korea after the Asian financial crisis, Germany after industrial restructuring, and China post-World Trade Organization entry. India now enters a similar window. The domestic engine is running. What needs redesign is external strategy. Responding with ambition rather than caution could turn this disruption into a catalyst that accelerates India’s rise in the global economic order.

 

 

Kumar is chairman, Pahle India Foundation, and former vice-chairman, NITI Aayog. Karkun is senior fellow, Pahle India Foundation