India’s FY26 Trade Deficit Widens: Early Warning Signs from April–May Data

Merchandise trade deficit up 17.1%, services cushion softens the blow - but tariff risks loom ahead

India’s Trade Trends for FY26: A Two-Month Check-In

The Directorate General of Foreign Trade (DGFT), along with RBI data, released India’s trade numbers for the first two months of FY26 (April–May 2025). While exports and imports are growing year-on-year, there are emerging signs of imbalance - particularly in merchandise trade.

India’s traditional trade pattern remains unchanged:

• Deficit in merchandise trade (goods)
• Surplus in services trade (software, consulting, business services)
• But overall, a net trade deficit persists.

Let’s break down what the early FY26 numbers reveal - and why global risks could tip the scale further in coming months.

Merchandise Trade Snapshot: Deficit Expands

While merchandise exports grew by 3.07% YoY to $77.19 billion, merchandise imports surged by 8.06% to $125.52 billion. The result?

The merchandise trade deficit widened to $48.33 billion, a 17.1% increase compared to the same period last year.

This could be due to:

• A slight slowdown in exports, especially non-oil, non-gold categories
• Front-loaded imports by Indian businesses in anticipation of upcoming U.S. tariff changes and supply disruptions

Services Trade Remains India’s Strength

If merchandise looks weak, services trade continues to shine.

• Services exports grew by 9.12% YoY to $65.24 billion
• Services imports rose just 1.22% to $34.05 billion
• This led to a services trade surplus of $31.19 billion, up 19.3% from last year

This rising surplus is key to softening the impact of India’s expanding merchandise gap - and reflects continued strength in India’s IT, consulting, and remote services industries.

Combined Trade Snapshot: Deficit Up 13.4%

When goods and services are combined, here’s how the numbers stack up for April–May FY26:

Notably, the ratio of services exports to merchandise exports has improved from 79.8% to 84.5%. Whether this reflects resilient services or a weakening goods sector is still unclear.

Early Signs of Tariff-Driven Pressure

So far, the data looks manageable - but it may not stay that way.

The Trump-era tariff measures are only partially in effect as of June. Most key tariffs on Indian goods are scheduled to begin from July 9, 2025. These could:

• Raise costs for Indian exporters to the U.S.
• Disrupt shipping lanes (due to war risks in West Asia)
• Push up freight and insurance premiums
• Trigger retaliatory tariffs or trade slowdowns

The Israel-Iran conflict adds to the uncertainty, especially in crude oil prices and shipping delays - factors not yet visible in April–May numbers.

What This Means for FY26 CAD

The Current Account Deficit (CAD) for FY26 will depend heavily on:

• How export momentum holds up post-July
• Whether services trade can continue offsetting goods imbalance
• Crude oil, rupee volatility, and U.S. interest rate policy

India’s overall trade deficit for April–May FY26 stands at $17.14 billion, 13.4% higher YoY. This points to possible CAD widening, unless exports strengthen or imports cool off in Q2.

The FY25 CAD figure is expected later this week, which will offer better clarity. But for now, investors, policymakers, and businesses need to prepare for potential trade shocks in Q2 FY26.

Disclaimer: The content in this article is for educational purposes only and does not constitute financial advice. Please consult a qualified financial advisor before making investment or business decisions.