India’s merchandise trade deficit narrowed for the second consecutive month in September 2026, supported by a 23.06% year-on-year increase in exports to $44.40 billion. The trade deficit declined 8.45% to $30.21 billion, while merchandise exports touched a record $132.5 billion in Q2 FY27.
However, external sector pressures persist. India’s current account deficit widened to $4.2 billion in Q1 FY27 as the higher merchandise trade gap outweighed stronger services receipts and remittances. Foreign portfolio investor outflows surged to $9.6 billion, while foreign exchange reserves declined by $8.1 billion.
During April–September FY27, India’s exports to the US increased 11.1% to $50.81 billion, while imports from the US rose nearly 26% to $32.33 billion. Among the top 10 export destinations, shipments declined to the UAE and the Netherlands but increased to the US, China, Singapore, the UK, Germany, South Africa, Bangladesh and Malaysia. Imports declined from the UAE and Saudi Arabia, while rising from China, Russia, the US, South Korea, Singapore, Hong Kong, Japan and Indonesia.
Targeted Import Substitution
Against this backdrop, the government is preparing a list of 100 intermediate goods for import substitution following interministerial consultations. The initiative forms part of a broader strategy to reduce non-essential imports, strengthen domestic manufacturing and generate employment.
The Economic Survey 2026 advocated a calibrated approach, recommending a three-tier classification of imports based on strategic importance, supply vulnerabilities and the economic viability of domestic production. It emphasised that import substitution should be prioritised where local manufacturing is feasible at reasonable cost but constrained by coordination failures, regulatory barriers or established procurement practices. Substitution of goods with diversified global supplies or prohibitive domestic production costs, however, could undermine economic competitiveness.
Former Additional Director General of Foreign Trade and Global Trade Research Institute (GTRI) Founder Ajay Srivastava said reducing the trade deficit requires targeted action on major import categories alongside stronger exports.
India’s major imports in FY26 included crude oil and petroleum products worth $174 billion, electronics worth $116 billion, coal at $28 billion, vegetable oils at $19.5 billion, plastic raw materials at $15.8 billion and fertilisers at $14.5 billion.
He called for long-term crude supply contracts at competitive prices, domestic manufacturing of electronic components, increased oilseed production, improved coal availability, greater fertiliser efficiency, stronger fruit cultivation and cold-chain infrastructure, and expansion of petrochemical capacity and plastics recycling.
He stressed that these initiatives must be supported by competitive domestic industries, higher goods and services exports, and prudent currency and external debt management.
District-Level Export Push
Former NITI Aayog Vice-Chairman and PAHLE India Foundation Chairman Rajiv Kumar called for India to increase its goods and services exports by more than 20% annually. He also advocated state-specific export promotion policies, arguing that a uniform national approach cannot adequately address the diverse industrial strengths and export potential of individual states.
The government is also working to broaden India’s export base by promoting shipments from districts across the country, with a focus on agricultural products, textiles, footwear, geographical indication (GI) products and engineering goods.
Under the Districts as Export Hubs (DEH) initiative, District Export Promotion Councils conducted meetings across 120 districts between June and August 2026. Meetings in 113 districts resulted in the creation of 32,000 new Importer Exporter Codes (IECs), with MSMEs accounting for 65% of the new registrations, indicating growing interest among first-time exporters.
The government aims to integrate the Districts as Export Hubs initiative with the Export Promotion Mission (EPM) and Free Trade Agreements (FTAs) to encourage small businesses and MSMEs to enter international markets. The approach combines district-level export handholding, financial support and preferential market access under FTAs.
By strengthening domestic manufacturing, reducing strategic import dependence and enabling businesses across districts to access global markets, India is seeking to improve its trade balance while building a broader and more competitive export economy.