India Forward — 17 September 2025
India’s evolving approach to foreign trade
India is likely to encourage more participation in global trade, which offers increasing gains in economic growth, capital attraction and employment opportunities.
By Deepa Kumar, Angus Lam, Hanna Luchnikava-Schorsch, Sophie Malin, and Khushi Yadav
Highlights
India’s new approach to foreign trade aims to leverage the country’s current economic structure while reconfiguring it to maximize the integration of Indian services into the global economy and spur domestic manufacturing through the promotion of investment opportunities.
Boosting India’s merchandise exports growth will require securing access to new markets, attracting foreign capital and gathering know-how for greater value addition and competitiveness.
India’s labor market offers opportunities and has constraints in terms of supporting investment catalyzed by trade agreements. Labor in India is abundant, young and regionally competitive but underutilized and underskilled.
India is less dependent on foreign trade for growth than other Asian economies, with merchandise exports accounting for only 11.2% of nominal GDP for fiscal 2024–25, and 20.8% of nominal GDP when services are included, according to S&P Global Market Intelligence. This dynamic makes India more resilient against global shocks or trade uncertainty, as its large domestic market provides a buffer. India’s approach, however, is cautiously evolving. In the coming years, India is likely to increase its participation in global trade. Expanding exports will boost India’s growth potential, improve market competitiveness, attract additional capital and generate employment opportunities for its young workforce. How India leverages labor market and banking sector interventions will be key to how it absorbs gains from foreign trade agreements.
How is India’s approach to foreign trade evolving?
As the global trade environment evolves, with trends emerging that suggest an increase in protectionist policies in different geographies and more regionalization of trade in Asia-Pacific, India’s approach to foreign trade is changing as well. The country’s new approach involves leveraging the current structure of its economy while also reconfiguring it. According to estimates from the Indian government, in fiscal 2024–25, services comprised more than 50% of India’s GDP, while manufacturing made up less than 20%. India’s plan is therefore to maximize Indian services’ integration into the global economy while promoting investment opportunities to spur domestic manufacturing.
These efforts are positioned alongside changing Indian diplomacy, where trade negotiations are multi-ministerial and concomitant to wider strategic considerations. For instance, the India-UK free trade agreement, signed in July 2025, covers the issues of bilateral duty rationalization on goods and promotion of Indian exports, but it also includes cooperation frameworks for developing military technologies and alignment on regional security posturing.
What is likely to continue in India’s foreign trade strategy, despite this changing approach, is the desire to closely link trade with political trust. India prefers bilateral deals, such as the India-UK free trade agreement, over multilateral agreements, such as the Regional Comprehensive Economic Partnership, which India exited in 2019. This stems from long-standing domestic concerns that multilateral agreements increase India’s import dependence, with little focus on deepening ties in services or boosting Indian manufacturing exports. In bilateral arrangements, India can more freely negotiate its position on duty levels, seek higher immigration opportunities for its people, and manage compliance with labor and environmental standards. This is a core principle of Indian foreign trade.
India’s multidimensional expectations from greater foreign trade cooperation
1. Enhancing market access for Indian goods: India’s approach will be to secure lower duties for goods exports through comprehensive economic agreements, as seen with the United Arab Emirates and Australia.
2. Pursuing win-win cooperation on services: The country intends to secure more international access to Indian services, including IT, professional and educational services. At the same time, India seeks increased inward support for services, especially in the financial and technology sectors.
3. Attracting additional inward capital flows: India will aim to include investment commitments in new agreements, such as those being negotiated with the EU. Foreign investment inflows into India remain tepid post-COVID-19; the government’s approach is likely to be more targeted.
4. Supporting domestic industrial policy reforms: India may leverage specific foreign trade arrangements with external partners, such as the US, to undertake targeted domestic reforms, such as integrated land acquisition and a tax incentive structure for key projects.
5. Diversifying India’s access to key resources: As global demand for diversified supply chains increases, India is likely to use new foreign trade agreements to secure access to strategic imports such as energy, fertilizers and rare earths.
6. Improving Indian industries’ competitiveness: India can promote quality improvements and better compliance with international standards through foreign trade agreements for sectors such as textiles and electronics.
7. Protecting sensitive domestic sectors: Foreign trade arrangements will allow the country to continue protecting sensitive domestic sectors, such as agriculture and dairy, as evidenced in India’s ongoing trade negotiations with the US.
Does India’s mixed trade performance in recent years signal an opportunity for improvement?
While India’s total merchandise exports reached a record $437.42 billion in fiscal 2024–25, growth has slowed over the past two years following a strong post-pandemic recovery. This can be attributed in large part to volatile global oil prices, with petroleum products accounting for a significant share of total exports.
Nonpetroleum exports, supported by government manufacturing sector incentives, a greater focus on global supply chain integration and rising global demand, grew 6.0% year over year in fiscal 2024–25 to $374.1 billion, according to India’s Ministry of Commerce and Industry. The exports retained the same rate of growth during the first quarter of fiscal 2025–26. Electronics exports grew 32.5% year over year in fiscal 2024–25, driven by a breakthrough in Indian smartphone manufacturing. Despite this sector-specific progress, India’s share of global manufacturing exports remains under 2%. The share of India’s services sector in global exports, however, nearly doubled over the last two decades to reach 4.2% for calendar year 2024.
Boosting merchandise export growth requires securing access to new markets, lowering barriers to trade, and attracting foreign capital and know-how to increase competitiveness.
India has one of the highest import tariffs globally, with a simple average most-favored nation (MFN) applied tariff rate of 15.9%, according to the World Trade Organization’s Tariff and Trade Data platform. However, its key merchandise exports, including agricultural products, textiles and apparel, footwear and leather goods, and automotive parts and electronics, are also among the products most protected by MFN tariffs globally.
Diversification is critical, as India’s merchandise exports are concentrated in a few key markets and commodities, with volumes outside these groups remaining comparatively low. India’s two largest export markets, the US and EU, accounted for a combined 39% of India’s merchandise exports in calendar year 2024. These markets are also the largest recipients of India’s services exports and key sources of foreign direct investment.
Ongoing changes in global trade policy, including the EU’s planned imposition of the Carbon Border Adjustment Mechanism and the EU Deforestation Regulation, mean India’s export outlook is at risk, underscoring the importance of reaching bilateral trade agreements with the US and EU.
What opportunities and constraints persist in India’s labor market?
India has a workforce of 731.2 million people, boasting an abundance of labor that surpasses that of the Southeast Asian economies and rivals mainland China’s. With India’s population set to grow an average of 0.8% per year between 2025 and 2030, according to the United Nations, the country is stepping into its demographic dividend era as many global economies try to swim against the silver tsunami of an aging workforce, which leads to an erosion of the mass of critical skills.
India’s labor supply is abundant but underutilized, which is risk-positive for India in foreign trade negotiations and in its bid to be more regionally competitive. The country’s relatively elevated unemployment rate of 8.8% and low participation rate of 66.9% for 2025 reveal a market with significant slack, according to S&P Global Market Intelligence. This leaves room for an uptick in job creation without triggering the excessive wage growth pressure that would typically be seen in tight labor markets such as Vietnam or Thailand.
India must address skill availability to enhance its regional competitiveness in foreign trade
India’s average hourly wage of $3.23 offers favorable cost savings compared with mainland China’s hourly wage of $5.81. While some Southeast Asian nations provide a lower wage floor, India’s wage level does not significantly outpace its close competitors. Further, wage growth, though well supported by fundamentals, has not reached the heights seen in Vietnam, where rapid escalation poses risks to cost stability.
However, skill availability remains a critical bottleneck. Real manufacturing value added per employed person offers a representation of the manufacturing sector’s skill base. Malaysian workers produced an average of $36,179 in value added in 2024, while mainland Chinese workers produced an average of $32,680. India falls far behind at an average of $8,741, highlighting skill capacity limitations.
India is struggling with a skills mismatch, which, alongside a focus on theoretical education, is contributing to an elevated unemployment rate, especially among youth. To address this, the Indian government has launched several initiatives, including internship programs and technical skill development centers designed to align workforce skills with industry needs. These programs are crucial for maximizing the potential employment benefits of India’s foreign trade agreements.
Reforms to India’s complex labor laws are in play and will help enhance the country’s capacity to benefit from foreign trade agreements. Simplification and harmonization will improve the ease of doing business in India, while revamping workers’ rights will make India more attractive as a foreign direct investment (FDI) location.
How can India's banking sector help maximize gains from foreign trade arrangements?
Despite India's rapid economic growth, its banking sector remains relatively small, with a credit-to-GDP ratio of less than 60% as of March 2025. While this ratio is much larger than those of other South Asian banking sectors, which average at about 34%, it is small compared with mainland China’s 200% credit-to-GDP ratio, indicating significant potential for loan growth.
India’s banking sector can expand its role, with approximately 70% of total outstanding loans allocated to businesses as of mid-2025. About 28% of these loans are directed toward the services sector, while about 21% of the total is allocated to the manufacturing sector.
The role of Indian banks in fostering inward FDI is primarily indirect, and credit for inward FDI purposes is estimated to be small. Between April 2022 and March 2025, total FDI into India accounted for only 8.6% of the total outstanding loan increase.
India’s banking sector is more attractive to foreign investment after undergoing significant improvements. The high nonperforming loan ratio and low capital buffers of the late 2010s have reversed. Banks are benefiting from a more efficient bad loan write-off process and an improved ability to raise capital freely on the open market, which reduces their reliance on government capital injections. With barriers to entry being relaxed, an increase in foreign entrants to the sector is anticipated.
There are also untapped opportunities in India’s banking sector to facilitate the second stage of financing once foreign companies have established operations in the country. The challenges facing foreign banks entering India are a stringent foreign ownership ceiling of 74% and a disproportionately low voting rights limit of 26%. This means that even if a foreign bank owns 74% of an Indian bank’s shares, it effectively only has 26% control over the bank’s decisions.
The Reserve Bank of India plays a role in fostering second-stage financing, attempting to make FDI more attractive operationally. Given India's low credit depth and modest historical FDI inflows, the associated credit risk from providing second-stage financing is expected to be low.
Easing capital controls is key to promoting inward FDI: While a nonresident Indian account comes with a $1 million repatriation limit for current income, the special nonresident rupee account has no specific repatriation limit. That said, closing a business and repatriating the capital likely requires additional authorization.
Looking forward
In pursuit of its strategic objectives via foreign trade, India is likely to seek a greater role in global trade rules-setting through organizations such as the World Trade Organization and at forums such as the G20 and UN Climate Change Conference. While India’s strategy is becoming increasingly integrated, its economy needs reforming, especially in terms of center-state and bureaucratic alignment, to leverage goods and services, promote exports and galvanize investments. Interventions in labor and banking need to be far-reaching and factor in myriad stakeholders. In addition to these domestic alterations, India must find international champions of its objectives to solidify its role as an ascending trading power.
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