India is stepping up efforts to narrow its trade deficit through targeted import substitution, stronger domestic manufacturing and a broader export base, as rising merchandise imports and capital outflows continue to weigh on the country’s external position.
India’s current account deficit widened to US$4.2 billion in Q1 FY27, while foreign portfolio investor (FPI) outflows reached US$9.6 billion and foreign exchange reserves declined by US$8.1 billion.
However, merchandise exports showed strong momentum in September 2026, rising 23.06% year-on-year to US$44.40 billion, while the trade deficit narrowed 8.45% to US$30.21 billion for the second consecutive month. India also recorded its highest-ever second-quarter merchandise exports of US$132.5 billion.
During April–September FY27, exports to the US increased 11.1% to US$50.81 billion, while imports from the country rose nearly 26% to US$32.33 billion.
As part of its import-reduction strategy, the government has identified 100 intermediate goods for potential domestic manufacturing following interministerial consultations. The initiative aims to reduce non-essential import dependence, strengthen indigenous production and generate employment.
The Economic Survey 2026 has advocated a targeted, three-tier approach to import substitution, prioritising strategically critical goods, products that can be manufactured competitively in India, and imports where domestic substitution would impose disproportionately high economic costs.
Ajay Srivastava, Founder of the Global Trade Research Institute (GTRI) and former Additional Director General of Foreign Trade, called for focused action on major import categories, including petroleum, electronics, coal, vegetable oils, fertilisers and plastics. He stressed the need for domestic electronic component manufacturing, expanded oilseed production, improved coal supply, greater fertiliser efficiency, stronger agricultural supply chains and increased petrochemical capacity.
Meanwhile, former NITI Aayog Vice-Chairman Rajiv Kumar called for India to achieve annual export growth of over 20% in goods and services. He also advocated state-specific export promotion policies to leverage the diverse industrial and economic strengths of individual states.
The government is also expanding its Districts as Export Hubs (DEH) initiative to bring more businesses into international trade. Between June and August 2026, District Export Promotion Councils held meetings across 120 districts. In 113 districts, around 32,000 new Importer Exporter Codes (IECs) were generated, with MSMEs accounting for 65% of the registrations.
The government aims to integrate the Districts as Export Hubs initiative with the Export Promotion Mission (EPM) and Free Trade Agreements (FTAs), combining local-level export support, financial assistance and preferential access to international markets.
The broader strategy is to strengthen India’s export competitiveness, reduce avoidable import dependence and expand foreign exchange earnings through greater participation by domestic industries and MSMEs in global trade.