Overall Trade Deficit higher in FY26, but still looks under control

MAR-26 MERCHANDISE TRADE DEFICIT SUBDUED AT $20.7 BILLION

One would have expected that the overall trade deficit for March 2026 and for FY26 would have widened substantially. While FY26 trade deficit and overall deficit are higher on a yoy basis, the war has not resulted in any major damage. In fact, even the higher trade deficit that you see in FY26 over FY25 is not due to oil imports, but due to a combination of higher gold imports and electronic component imports. Overall trade for FY26 stood at $1.84 trillion, compared to $1.75 trillion in FY25. What is interesting is that the services exports are now almost coming at par with the merchandise exports.

Data Source: DGFT (Figures in $ Billion)

READING THE OVERALL TRADE DATA FOR FY26

• The first section (purple shade) shows the trade in physical goods. Merchandise deficit was up 17.5%; due to flat exports amid the US tariffs on Indian exports.

• The second section (green shade) shows the trade in services. Dominated by IT exports, the services exports are now almost at par with export of physical goods.

• The overall trade deficit is the net impact of the goods and services. It is up 26%, largely due to a surge in the merchandise deficit in FY26, compared to FY25.

• The services trade surplus has managed to offset 64.2% of the goods trade deficit in FY26. In the previous year FY25, this ration was slightly higher at 66.7%.

BREAKING UP THE TRADE STORY FOR FY26

Here are some quick takeaways for investors from the trade data for FY26 overall.

• Let us look at big drivers of merchandise export basket and the yoy change. The big guns were Petroleum Products $53.9 billion (-15.0%), Electronics Goods $48.0 billion (+24.4%), Pharma $31.1 billion (+2.1%), and Chemicals $28.7 billion (-0.1%).

• Let us turn to big drivers of merchandise import basket and the yoy change. The big guns were Petroleum Products $174.0 billion (-6.4%), Electronic Goods $116.2 billion (+17.8%), Gold $72.0 billion (+24.1%), and Machinery $61.7 billion (+15.6%).

• A quick word on the above two baskets. Electronic exports are largely mobile phone exports, while pharma and chemicals have been less impacted by the tariffs; compared to textiles and gems & jewellery. Gold imports are an area of concern!

• What is the overall situation for FY26? Combined exports are up 4.2%, while combined imports are up 6.5%. This has resulted in a 26.0% higher overall deficit in FY26 as compared to FY25. The full impact of war may only be felt in FY27.

• For fiscal year FY26, the top export destinations for Indian goods exports by value were; the US, UAE, China, the Netherlands, and the UK. Top import sources for India based on value of imports were China, UAE, Russia, the US, and Saudi Arabia. Spain saw the best yoy export growth; while highest import growth was with the UK.

With the ongoing war in the Middle East and the Straits of Hormuz remaining blocked for a long time, the impact will be felt by India in FY27. It also remains to be seen how the IT sector continues to drive services exports, amid the AI-based disruption.