India's trade crossroads: Navigating global headwinds with domestic resilience

India's trade report for October this year is a reminder that even fast-growing economies face external shocks that test both resilience and vulnerability. The month delivered a record trade deficit in merchandise of $41.7 billion, driven by a 200 per cent surge in gold imports and a steep 37.5 per cent drop in exports to the United States (US) after tariffs jumped from 10 per cent to 50 per cent in six months.

- RAJIV KUMAR & KUNTALA KARKUN

Yet the broader picture is not of an economy veering into crisis. Growth remains steady at 6-7 per cent, the inflation rate has cooled to an all-time low of 0.25 per cent, and the current account deficit at 1.2 per cent of gross domestic product (GDP) sits comfortably within the 1-3 per cent emerging-market benchmark and below the European Union (EU) and US levels. The challenge is not reversal but recalibration: India must redesign its external strategy even as domestic engines stay strong.

Three simultaneous shocks

India is navigating three overlapping pressures.

First, gold imports surged nearly 200 per cent year-on-year, not only due to festival demand but also because households' use of gold as a cushion against inflation, currency risks, and global uncertainty. Unlike Singapore, which operates a major gold-trading hub without importing the physical metal, India still relies on bullion, underscoring an opportunity to deepen financialisation.

Second, the sharp escalation of US tariffs has eroded export competitiveness in textile, engineering goods, and gems and jewellery the sectors heavily dependent on American buyers.

These traditionally strong categories contracted 11-16 per cent in a single quarter, reflecting the risk of excessive market concentration. While Vietnam, Mexico, and Bangladesh diversified export ties over the past decade, India remains overexposed to one destination.

Third, capital flows diverged sharply. Foreign direct investment (FDI) rose to $81 billion, signalling long-term confidence, while foreign institutional investors (FIIs) withdrew $24 billion, pushing the rupee to record lows. Similar episodes in Brazil and Turkey show how volatile portfolio flows can magnify vulnerabilities even amid solid fundamentals. For India, the message is clear: Sentiment can shift abruptly.