Why in News?

Data released by the Ministry of Commerce and Industry revealed that India's merchandise exports surged by nearly 20% year-on-year in July 2026, reaching USD 44.2 billion. This growth was achieved despite ongoing geopolitical turmoil in West Asia, driven largely by strategic market diversification and rerouting of maritime trade.

Key Trends in India's Exports

Merchandise Trade Performance

  • Goods exports: Registered year-on-year growth of 19.6% compared to July 2025
  • Merchandise imports: Grew at a slower pace of 17.5% to reach USD 76.2 billion

Services Sector Performance

  • Services exports: Grew by a modest 6.4% to USD 35.9 billion
  • Services imports: Increased faster at 9.5% to USD 18.9 billion

Trade Deficit

  • Combined trade deficit widened to USD 15 billion from USD 11.4 billion in July 2025
  • Main reason: Services imports grew faster than services exports

Sectoral Drivers of Export Growth

  • Petroleum Products: Accounted for approximately 39% of total growth, spurred by elevated global prices
  • Electronic Goods: Exports grew by an impressive 30.7% between April-July 2026, nearly doubling their share in merchandise exports
  • Engineering Goods: Witnessed 18.2% expansion
  • Agri & Allied Sectors: Positive traction in marine products, meat, dairy, poultry, and traditional handicrafts

Strategic Rerouting and Geographical Diversification

Bypassing Choke Points

  • Exporters strategically shifted cargo handling from dominant hubs like Jebel Ali Port to alternative ports in Oman, Fujairah, and Khor Fakkan (UAE) to mitigate risks of the Strait of Hormuz

New Market Penetration

  • Asia: Exports to China grew by 65% in July 2026; Singapore's share rose from 2.7% to 4.7%; strong non-petroleum export growth in Vietnam and Taiwan
  • Africa: Exports to Tanzania spiked by 130%, with robust growth in Kenya and South African Customs Union (SACU) region
  • Traditional Markets: US remained India's largest merchandise export market, accounting for roughly one-fifth of total exports

Major Challenges to India's Export Competitiveness

The Middle-Technology Trap

India faces a dual competitiveness challenge:

  • Cannot compete with low-cost economies like Bangladesh and Vietnam in labour-intensive sectors
  • Lags behind China, South Korea, and Taiwan in high-technology manufacturing

R&D Deficit

  • India's Gross Domestic Expenditure on R&D (GERD) remains around 0.65% of GDP
  • Limits indigenous technological innovation
  • Difficult to move from low-value assembly to high-value component manufacturing

Weaponisation of Trade Standards

  • Non-Tariff Barriers (NTBs) threatening Indian exports:
  • EU's Carbon Border Adjustment Mechanism (CBAM)
  • Strict deforestation laws
  • US "forced labor" investigations
  • Stringent ESG (Environmental, Social, Governance) compliance demands
  • Creates massive compliance costs and market-entry bottlenecks for Indian MSMEs

Export Basket Vulnerability

  • Heavy reliance on refined petroleum exports can overstate the strength of export performance
  • These are dependent on imported crude oil and global oil prices

Geopolitical & Supply-Chain Risks

  • Conflicts in West Asia and Red Sea can disrupt shipping routes
  • Raise freight costs and increase transit times

Inverted Duty Structure

  • Higher duties on raw materials and intermediate inputs than finished goods
  • Discourages domestic value addition
  • Weakens competitiveness in Global Value Chains (GVCs)

Dependence on Chinese Intermediates

  • Critical sectors like pharmaceuticals and electronics remain dependent on Chinese inputs
  • Creates supply-chain vulnerabilities

Low FTA Utilisation

  • Despite signing recent trade deals (UAE, Australia), utilisation rate remains low at around 25%
  • Causes: Complex Rules of Origin (ROO) criteria and lack of institutional awareness
  • Partner countries often leverage FTAs more effectively to capture Indian domestic market

Measures to Strengthen India's Export Competitiveness

1. Pivoting to High-Tech GVC Integration

  • Move beyond basic assembly-centric PLI schemes
  • Incentivize deep-tier manufacturing in:
  • Semiconductors
  • Green energy technologies
  • Precision engineering
  • Electronics Component Manufacturing Scheme (ECMS) and India Semiconductor Mission 2.0 are steps in the right direction
  • Similar deep-tier localization needed in pharmaceuticals (APIs) and telecom

2. Preemptive ESG Institutionalization

  • Establish globally accredited domestic carbon pricing markets
  • Assist MSMEs through TRACE framework (Trade Regulations, Accreditation & Compliance Enablement)
  • Absorb compliance costs of international testing and green certifications

3. Next-Generation Trade Diplomacy (FTAs 2.0)

  • Dual-track strategy for future Free Trade Agreements:
  • Aggressively secure market access for services sector (Mode 4 mobility)
  • Establish stringent Rules of Origin (ROO) to prevent third-party dumping

4. Logistical Optimization

  • High logistics costs act as a hidden tax on exports
  • Expedited implementation of National Logistics Policy
  • Leverage LIFT (Logistics Interventions for Freight & Transport) scheme
  • Shift freight from congested roads to dedicated rail corridors and coastal shipping
  • Target: Reduce logistics costs to global benchmark of 7-8% of GDP

5. Correct Inverted Duty Structures

  • Rationalise tariffs so that inputs are not taxed more heavily than finished products
  • Encourage domestic value addition and export competitiveness

6. Strengthen MSME Export Capacity

  • Expand affordable trade finance, export credit, insurance
  • Support branding, certification, and market intelligence
  • Export Promotion Mission targets these through Niryat Protsahan and Niryat Disha

Constitutional/Policy References

  • PLING Scheme (Production Linked Incentive)
  • National Logistics Policy (2022)
  • Electronics Component Manufacturing Scheme (ECMS)
  • India Semiconductor Mission 2.0
  • TRACE Framework (proposed)
  • LIFT Scheme (proposed)
  • FTA Framework (UAE-CEPA, Australia-India ECTA)

Conclusion

India must shift from "export promotion" to "export competitiveness" by strengthening technology, competitive inputs, resilient logistics, skilled labour, and deeper GVC integration. This will help India move beyond low-cost assembly and emerge as a high-value global manufacturing hub, supporting its ambition to become a $5 trillion economy and a "Factory to the World."