The Foreign Trade of India Explained

The foreign trade of India covers everything the country sells to and buys from the rest of the world, in both goods and services. It links Indian farms, factories and software firms to global customers, supplies the oil, machinery, electronics and other inputs that the economy needs, and plays a large part in determining the country’s external balance and exchange rate. Since the economic reforms of 1991, trade has grown from a small share of national output to one of the main engines of growth.

India’s trade has a distinctive shape. In merchandise (goods) trade it usually imports more than it exports, creating a trade deficit, while in services it earns a large surplus, led by information technology and business services. This explainer sets out how trade is organised and regulated, what India exports and imports, who its main partners are, and how institutions such as the DGFT, special economic zones and free trade agreements fit into the picture.

Quick Facts

A Brief History of India’s Trade Policy

For most of its history, India was a major trading civilisation. Spices, textiles, gems and metals travelled along land and sea routes to Rome, West Asia, South-East Asia and later Europe. Colonial rule reshaped this pattern, turning India into a supplier of raw materials such as cotton, jute and indigo and a market for British manufactured goods.

After Independence in 1947, planners favoured self-reliance and import substitution. High tariffs, import licensing and quantitative restrictions protected domestic industry, and exports were treated as a way of earning foreign exchange for essential imports. This policy built a broad industrial base but left Indian firms insulated from global competition.

Phases of change

• 1950s to 1980s: import substitution, licensing, and an emphasis on heavy industry. Export promotion started with the establishment of the Kandla Export Processing Zone in 1965, the first in Asia.
• 1991 crisis and reforms: a severe balance of payments crisis led to liberalisation, rupee devaluation, reduction of import licensing and lower tariffs.
• 1995 onwards: membership of the World Trade Organization and the phasing out of quantitative restrictions.
• 2000s: the Special Economic Zones policy, and the Foreign Trade Policy replaced the older Export-Import (EXIM) Policy as the main framework.
• 2010s and 2020s: a mix of trade facilitation, export incentives, new free trade agreements and policies aimed at domestic manufacturing.

The Legal and Institutional Framework

The foreign trade of India is governed by a layered set of laws and agencies. The Foreign Trade (Development and Regulation) Act, 1992 gives the Central Government powers to develop and regulate foreign trade by facilitating imports and augmenting exports. It replaced the earlier Imports and Exports (Control) Act, 1947 and provides for the issue of licences, the Importer Exporter Code and the Foreign Trade Policy.

Main institutions

• Ministry of Commerce and Industry: the lead ministry, comprising the Department of Commerce and the Department for Promotion of Industry and Internal Trade.
• DGFT: implements the Foreign Trade Policy and issues authorisations and the Importer Exporter Code (IEC).
• Central Board of Indirect Taxes and Customs (CBIC): administers customs duties and enforces rules at ports, airports and land borders.
• Directorate General of Trade Remedies (DGTR): investigates dumping, subsidies and import surges and recommends anti-dumping, countervailing and safeguard duties.
• Reserve Bank of India: regulates foreign exchange transactions under FEMA, 1999, which replaced the stricter FERA, 1973.
• Export Promotion Councils and commodity boards: industry bodies for sectors such as engineering, textiles, gems and jewellery, pharmaceuticals and spices.
• EXIM Bank and ECGC: institutions that provide export finance and credit insurance.

The DGFT and the Foreign Trade Policy

The Directorate General of Foreign Trade, headquartered in New Delhi with regional authorities across the country, is the main agency that puts trade policy into practice. Any person who wants to import or export goods and services generally needs an Importer Exporter Code, a unique ten-character identifier issued by the DGFT, though some exemptions apply.

Foreign Trade Policy 2023

The Foreign Trade Policy is announced by the Central Government and sets out the incentives, procedures and restrictions on trade. The policy notified in March 2023 and effective from 1 April 2023 differs from earlier five-year policies in that it was designed as a dynamic document without a fixed end date, so that it can be updated as conditions change. Its stated themes include:

• Moving from an incentive-based approach toward remission of duties and taxes and toward ease of doing business.
• Export promotion through collaboration among exporters, states, districts and Indian missions abroad.
• Development of “Districts as Export Hubs” and “Towns of Export Excellence” to support local products.
• Recognition of high-performing firms as Status Holders, with simplified procedures.
• Promotion of e-commerce exports and streamlining of schemes such as Advance Authorisation and Export Promotion Capital Goods (EPCG).

The Policy also covers the classification of items as free, restricted or prohibited for import and export, using the ITC (HS) codes, which are the Indian version of the global Harmonised System of tariff classification.

Composition of India’s Exports

India’s export basket is more diversified than that of many developing economies, with a mix of traditional goods, manufactured items and a growing group of high-value products. The exact shares change every year, but the main categories remain relatively stable.

Major merchandise export groups

• Petroleum products: refined fuels from Indian refineries form one of the largest export items by value, even though India imports most of its crude oil.
• Engineering goods: machinery, auto components, vehicles, iron and steel products and electrical equipment.
• Gems and jewellery: cut and polished diamonds and jewellery, where India has a leading global processing role.
• Pharmaceuticals: generic medicines and vaccines, which have made India a major global supplier of affordable drugs.
• Textiles and apparel: cotton yarn, fabrics, readymade garments and handloom products.
• Agricultural and marine products: rice, spices, tea, coffee, sugar, meat and seafood.
• Electronics: a fast-growing category, notably mobile phones, as domestic assembly has expanded.
• Chemicals: organic and inorganic chemicals, dyes and specialty chemicals.

Composition of India’s Imports

India’s imports reflect the needs of a large, growing and resource-limited economy. They are dominated by a few high-value categories that explain much of the trade deficit.

Major import groups

• Crude oil and petroleum: India meets the majority of its oil needs through imports, so energy is the single largest import bill.
• Gold and precious stones: driven by jewellery and investment demand and, for diamonds, by the processing industry.
• Electronic goods and components: mobile phones, computer hardware, semiconductors and telecommunication equipment.
• Machinery and capital goods: imports of machinery, transport equipment and electrical machinery for industry.
• Coal and coke: especially for steel and power generation.
• Fertilisers and chemicals: important for agriculture and industry.
• Vegetable oils: India imports a large part of its edible oil requirements, particularly palm, soyabean and sunflower oil.

Because oil and gold are such large items, the trade deficit is sensitive to international crude prices and to the rupee’s exchange rate.

The Trade Deficit and the Balance of Payments

The trade balance is the difference between the value of exports and imports of goods. India has recorded a merchandise trade deficit for most years since Independence. This does not automatically mean a weak economy, since a growing economy with investment needs typically imports capital goods and inputs, but a large deficit can create pressure on the currency and on reserves.

Where trade fits in the balance of payments

The balance of payments (BoP) is the complete record of a country’s economic transactions with the world. It has two main parts:

India’s goods deficit is partly offset by surpluses in services and by remittances from Indians working abroad, which are among the largest in the world. The resulting current account deficit is financed by capital inflows such as foreign direct investment and portfolio flows. The 1991 crisis arose when this financing dried up and reserves fell to very low levels, which is why the level of foreign exchange reserves is closely watched.

Services Exports and the IT Surplus

Services are the most successful part of India’s external sector. Exports of services have grown quickly since the 1990s, led by software and information technology, IT-enabled services such as business process outsourcing, and more recently global capability centres, in which multinational firms set up large technology and operations hubs in India.

Why India is strong in services

• A large pool of English-speaking, technically trained graduates.
• Cost advantages combined with time zone differences that allow round-the-clock operations.
• Early support through Software Technology Parks of India (set up in 1991) and tax incentives.
• Strong clusters in cities such as Bengaluru, Hyderabad, Pune, Chennai, Gurugram and Noida.

Other services exports include travel and tourism, transport, financial services, professional and management consulting, and research and development. Services earn a net surplus that offsets a considerable part of the goods deficit, and they are a major source of employment for skilled workers. Services trade is also the focus of negotiations on mobility of professionals and data rules in trade agreements.

Direction of Trade: Major Partners

The direction of trade shows who India trades with. Its partners have changed over time from a heavy dependence on Britain and the Soviet Union to a more diverse mix across Asia, the Americas, Europe and the Gulf.

Leading partners

• United States: consistently among the largest export destinations, buying services, pharmaceuticals, textiles, gems and engineering goods, and a key partner in technology.
• China: the largest source of imports of electronics, machinery and chemicals, which gives India a large bilateral trade deficit with it.
• United Arab Emirates: a major two-way partner, important for petroleum products, gold and re-exports, and linked with India through a comprehensive trade agreement.
• Saudi Arabia, Iraq and other Gulf countries: traditional crude oil and gas suppliers.
• Russia: a longstanding defence and energy partner whose crude oil share in India’s imports has changed noticeably in recent years.
• European Union: collectively one of India’s largest trading blocs, buying a wide range of goods and services.
• Neighbours and ASEAN: Singapore, Indonesia, Malaysia, Bangladesh, Nepal and others for goods such as palm oil, coal, machinery and food items.

The ranking of partners shifts from year to year, so current trade statistics should be read from the Department of Commerce.

Free Trade Agreements and Trade Blocs

India uses bilateral and regional agreements to widen market access. These range from simple preferential trade agreements to comprehensive economic partnership agreements that cover goods, services and investment.

Selected agreements

India decided in 2019 not to join the Regional Comprehensive Economic Partnership (RCEP), citing concerns about its trade deficits and domestic sectors. It continues to be an active participant in the WTO, where it has been prominent on issues such as agricultural subsidies and food security, and in groupings such as BRICS and the G20.

SEZs, EOUs and Export Promotion Schemes

Special economic zones and export-oriented units are meant to give exporters a duty-free, simpler environment. They form an important part of the infrastructure of Indian foreign trade.

Special Economic Zones

India set up its first export processing zone at Kandla in 1965. The SEZ policy was introduced in 2000, and the Special Economic Zones Act, 2005 came into force in 2006 to give a statutory basis. SEZs are treated as foreign territory for trade operations and tariffs, and units in them enjoy duty-free imports, simplified compliance and certain tax benefits. They host sectors such as IT, electronics, gems and jewellery, pharmaceuticals and engineering.

Other schemes

• Export Oriented Units (EOUs): units outside the SEZs that export their entire production and import inputs duty-free, a scheme introduced in 1981.
• Advance Authorisation: duty-free import of inputs physically incorporated in an export product.
• EPCG scheme: import of capital goods at reduced or nil duty against an export obligation.
• Remission of duties and taxes on exported products: a mechanism that refunds embedded levies not otherwise rebated, in line with WTO rules.
• Production-linked incentives: domestic manufacturing incentives in sectors such as electronics, pharmaceuticals and textiles, which are intended to boost both output and exports.

Challenges and Prospects

The foreign trade of India faces both opportunities and constraints. Global demand, geopolitical tensions, shipping costs, tariff changes in major markets and fluctuations in oil prices all affect trade outcomes. At home, issues such as logistics costs, infrastructure, compliance burden and the scale of manufacturing exports remain important.

Commonly discussed challenges

• High dependence on imported energy and electronics, which makes the deficit sensitive to prices.
• Non-tariff barriers abroad, such as standards, sanitary rules and technical requirements.
• Competition from other manufacturing economies in labour-intensive products like garments and footwear.
• Logistics and port efficiency, although digital systems such as ICEGATE and the national single window have improved processing.

Directions of policy

Policy discussions revolve around raising manufacturing exports, deepening integration with global value chains, expanding trade in services, encouraging settlement of trade in the rupee and other currencies, and negotiating balanced trade agreements. As the economy grows, trade is expected to remain central to India’s economic strategy.

Frequently Asked Questions

What is the foreign trade of India?

The foreign trade of India is the exchange of goods and services between India and other countries, comprising exports and imports. It is governed by the Foreign Trade (Development and Regulation) Act, 1992 and implemented through the Foreign Trade Policy by the Directorate General of Foreign Trade.

Why does India have a trade deficit?

India imports more goods than it exports, mainly because of its large bills for crude oil, gold and electronic goods. The goods deficit is partly offset by a surplus in services exports and by remittances from Indians working overseas.

What are India’s main exports?

India’s main merchandise exports include petroleum products, engineering goods, gems and jewellery, pharmaceuticals, textiles and garments, agricultural and marine products, and electronics. In services, software and IT-enabled services are the largest earners.

What does the DGFT do?

The Directorate General of Foreign Trade is the agency under the Ministry of Commerce and Industry that implements the Foreign Trade Policy. It issues the Importer Exporter Code, grants authorisations and schemes such as Advance Authorisation, and administers rules on restricted and prohibited items.

What is the difference between an SEZ and an EOU?

A Special Economic Zone is a designated duty-free enclave treated as foreign territory for trade purposes, hosting many units under a common framework. An Export Oriented Unit is a stand-alone unit located anywhere that exports its entire output and receives duty-free inputs and other benefits.

Which free trade agreements has India signed?

India has signed agreements including SAFTA, the India-ASEAN goods agreement, comprehensive agreements with Japan, Korea and Singapore, and newer partnerships with the UAE and Australia in 2022. It has also been negotiating further agreements with other economies and blocs.