India's External Trade: Services Shine Amid Merchandise Export Slowdown

India's external sector faces mixed signals as merchandise exports slow down due to tariff issues, while services exports support the current account. CareEdge highlights concerns over US tariffs and potential threats from increased H-1B visa fees. Services are expected to be the stabilizing force in FY26.

The Indian external sector is displaying divergent trends as highlighted by a recent CareEdge report. While merchandise exports struggle with momentum due to tariff-related challenges, services exports are buoying the current account balance.

CareEdge indicates that even as merchandise exports adapt to a difficult environment, services trade and transfer surpluses are likely to sustain their support. An additional buffer could come from maintaining low global crude oil prices, aiding India's current account deficit to remain manageable at approximately 1% of GDP for FY26.

The beneficial front-loading of exports at the start of FY26 is waning, with non-petroleum exports falling 3.9% in September-October 2025, reversing previous gains. The 50% reciprocal tariffs enacted by the US have exerted substantial pressure on key Indian export sectors. Labor-intensive sectors like gems, jewelry, and textiles have seen significant declines, though higher shipments to markets like the UAE and China offer some offset. However, the broader impact of these shifts on India's export landscape remains unclear.

Contrastingly, electronic goods and petroleum-based products have maintained resilience, aided by tariff exemptions in the US. India's imports have surged, driven by strong economic activity and soaring demand for precious metals, leading to a $199 billion trade deficit, the widest in recent history.

Despite goods trade pressures, services exports increased by 8.2% in the first part of FY26, led by software services and other business services growth. These exports, being less affected by tariffs, have been crucial in maintaining India's external balance.

Future forecasts from CareEdge caution about the possible implications of higher H-1B visa fees and new US legal measures potentially hindering outsourcing. These factors are crucial to monitor for India's services export performance. The current account deficit widened to $12.3 billion in the second quarter of FY26, driven by merchandise trade deterioration. However, increased remittances and robust services exports have helped mitigate these challenges.

Looking ahead, CareEdge projects a 1% contraction in overall merchandise exports for FY26, with imports set for a 5% rise due to steady domestic demand. Services exports are expected to grow by 8.5%, continuing to stabilize the current account.

(With inputs from agencies.)