Changing Directions in India’s Foreign Trade: Key Partners and Emerging Markets

Two decades ago, the story of India’s foreign trade was fairly predictable: sell to America and Europe, buy oil and machinery from a handful of familiar partners. That map has been redrawn. China now sits at the top of India’s trade partner list despite years of border tension, the UAE has turned itself into a re-export superhighway, and countries in Africa and Latin America that barely registered in trade data a decade ago are now crossing the hundred-billion-dollar mark. Tracking how the direction of India’s trade has shifted tells you almost as much about the country’s economic priorities as any budget speech.

What “direction of trade” actually measures 🔗

When economists talk about the direction of trade, they mean who India trades with, not what it trades. Composition of trade looks at products, direction looks at countries and regions. Both matter, but direction is where geopolitics, foreign policy, and diplomacy show up most clearly in economic data. A shift in direction can signal a new alliance, a broken one, or simply a market that has become too big to ignore.

The old anchors: the United States and the European Union 🔗

For most of the post-liberalisation period, the US and the EU have been India’s most dependable buyers, especially for pharmaceuticals, IT services, textiles, and gems and jewellery. That relationship hasn’t gone away. India’s trade dynamics have been shifting steadily, with ties with the US strengthening even as trade with China grows more complicated. The EU as a bloc remains one of India’s largest trading partners, and both sides are working toward a long-pending trade agreement, discussed further below.

What has changed is India’s dependence on these traditional markets as a share of the total pie. The US and EU are no longer the only large buyers in the room, and that has real consequences for how India negotiates, invests in export infrastructure, and manages currency and tariff risk.

China’s paradox: top trading partner, deepest deficit 🔗

In 2025-26, China overtook the US to become India’s single largest trading partner again, with bilateral trade reaching $151.1 billion while India’s trade deficit with Beijing widened to $112 billion. This is the paradox at the heart of India-China trade: the relationship keeps growing in volume, but almost entirely in one direction. India buys enormous quantities of electronics components, active pharmaceutical ingredients, and machinery from China, while its own exports to China remain comparatively modest.

This lopsided dependence is exactly why diversification has become a policy priority rather than a talking point. A country can’t easily walk away from its largest trading partner, but it can work hard to make sure no single country holds that much leverage over its supply chains.

UAE and the Gulf: India’s trade bridge 🔗

The UAE remained India’s third-largest trading partner in 2024-25, with total trade amounting to $100.5 billion. Much of this isn’t just bilateral commerce; the UAE functions as a re-export and logistics hub connecting India to Africa, Europe, and the rest of the Gulf. The India-UAE Comprehensive Economic Partnership Agreement, in force since 2022, has already helped Indian textile and gem exporters gain a tariff edge in the market. Saudi Arabia and Iraq continue to matter mainly as crude oil suppliers, keeping the wider Gulf central to India’s energy security even as the pattern of trade diversifies elsewhere.

The pivot toward emerging markets 🔗

The most interesting part of this story isn’t what’s happening with India’s largest partners, but with the ones that used to be footnotes.

Africa: crossing the 0 billion mark 🔗

India-Africa trade has nearly doubled in five years. Bilateral trade crossed $100 billion in 2024-25, up from around $56 billion in 2019-20, and the commerce ministry has set a target to double that figure again by 2030. Energy, minerals, pharmaceuticals, and agriculture dominate the relationship, and India’s investments across the continent, built up over nearly three decades, are increasingly turning into deeper trade ties rather than one-off deals.

Latin America: distant but rising 🔗

Latin America has historically been a footnote in Indian trade textbooks, largely because of geographic distance and limited direct shipping links. That’s changing. Total bilateral trade with the region rose to $39.21 billion in FY 2024-25, with India actively negotiating trade arrangements with Peru and Chile and launching a new engagement framework with Mexico. The region supplies India with edible oils, copper, and other raw materials, while Indian pharmaceuticals, vehicles, and engineering goods find growing demand there. It’s not a substitute for the US or China yet, but it’s no longer negligible either.

Free trade agreements: engineering the shift 🔗

None of this diversification happened by accident. India has used free trade agreements (FTAs) and comprehensive economic partnership agreements (CEPAs) as deliberate tools to redirect trade flows, especially after it walked away from the mega-regional Regional Comprehensive Economic Partnership (RCEP) in November 2019 over concerns about a flood of Chinese imports.

The data on FTA partners backs up the strategy. According to trade research body GTRI, India’s exports to its FTA partner countries rose 14.48 percent to $122.72 billion between 2018-19 and 2023-24, even as imports from those same partners grew faster. That’s a reminder that FTAs are a double-edged tool: they open new markets for Indian exporters, but they also expose domestic producers to more competition. India’s own history with the ASEAN FTA, built up steadily under the Act East Policy, shows both sides of this trade-off in the numbers.

What’s next: the EU, the UK, and beyond 🔗

India is now negotiating or has recently concluded agreements with several more partners. Talks with the UK, the European Union, and members of the Gulf Cooperation Council are progressing, alongside a formal CEPA negotiation with Oman and a review of the older ASEAN goods agreement to make it more business-friendly. This flurry of activity fits a broader pattern: India carries one of the highest average import tariffs among major economies, at close to 16 percent, so trade negotiators are under real pressure to trade tariff concessions for guaranteed market access abroad. Electronics exports, for instance, grew over 32 percent in a single year on the back of expanding smartphone manufacturing, and sustaining that pace depends heavily on securing more of these market-access deals.

Why this diversification actually matters 🔗

Spreading trade across more countries isn’t just about chasing bigger numbers. It’s a resilience strategy. Under UNCTAD’s trade diversity indices, India ranks among the top five economies in the Global South for the diversity of its traded products and among the top three for the diversity of its trade partnerships. That diversity acts as a buffer: if demand slows in one region or a geopolitical dispute disrupts one corridor, exporters have other markets to lean on.

The long-term trend confirms this. Analysis by Ministry of Finance officials shows that the share of India’s top 10 export destinations fell from 56.6 percent of total merchandise exports in FY2000 to 46.8 percent in FY23, with the concentration index for these countries dropping correspondingly. In plain terms, India is no longer betting its export fortunes on a handful of familiar buyers. It’s a slower, harder path to build than simply doubling down on the US or the EU, but it’s a far more stable one for a country that wants steady, long-term growth in a world where trade politics can shift overnight.

What do you think? As China remains India’s top trading partner despite the widening deficit and ongoing strategic tension, is deepening this relationship a pragmatic necessity or a long-term risk? And with so many new FTAs on the horizon, do you think Indian producers stand to gain more from wider market access than they risk losing to cheaper imports?

References

1. https://www.business-standard.com/economy/news/economy-india-us-trade-2025-top-partner-deficit-china-125041600483_1.html
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