New Delhi, 6 February 2026
By Tannaz Ahmed and Tushar Gandhi
NITI Aayog’s Trade Watch Quarterly for Q1 FY26 (April–June 2026)[1] offers a detailed snapshot of India’s trade performance at a time of moderate global recovery. While the report carries a thematic focus on automotive exports, a key insight lies in its assessment of India’s Free Trade Agreements (FTAs) and their evolving impact on trade outcomes.
Rather than revisiting the case for FTAs in principle, the quarterly examines how existing agreements are performing in practice, raising important questions about sequencing, competitiveness, and alignment with domestic production capacity.
Trade Context and FTA Exposure
In Q1 FY26, India’s total merchandise and services trade reached USD 439 billion, registering 3.5% year-on-year growth. Services exports continued to anchor overall trade performance, expanding by 10% and generating a USD 48 billion surplus, which partially offset pressures on the merchandise trade balance.
Within this broader trade context, the report notes a widening trade deficit with FTA partners, drawing attention to the evolving balance between imports and exports under existing preferential trade arrangements.
Rising Trade Deficit with FTA Partners
A key finding of the quarterly is a 59.2% year-on-year increase in India’s trade deficit with FTA partners during April–June. The widening gap reflects import growth outpacing exports, indicating that preferential market access has translated unevenly into export outcomes across sectors.
The report highlights uneven performance across FTA partner regions, including parts of ASEAN, where export growth has lagged relative to import expansion. These patterns underscore the need to examine how sectoral competitiveness and production capabilities interact with preferential trade frameworks, rather than attributing outcomes solely to the presence of FTAs.
FTAs and Structural Competitiveness
Rather than framing the FTA deficit as a short-term imbalance, the Trade Watch Quarterly places it within a broader structural context:
- Import growth from FTA partners is concentrated in intermediate and capital goods, consistent with India’s participation in global value chains.
- Export underperformance highlights the need to assess domestic competitiveness and export readiness across sectors.
This framing suggests that FTA trade outcomes draw attention to factors influencing production and export readiness, rather than market access alone.
Sectoral Signals from FTA Trade
The report highlights notable shifts in export composition that interact with FTA outcomes. Electronics exports grew 47% year-on-year, accounting for over 11% of total exports, underscoring India’s expanding role in technology-intensive value chains.
In contrast, traditional export drivers such as petroleum products saw relative decline. This divergence indicates that FTA benefits are more likely to result in sectors where India is integrated into global production networks, rather than in legacy commodity-driven exports.
Automotive Focus as an FTA Case Study
Although the report’s thematic section focuses on automotive exports, its relevance to FTAs is broader. The analysis points to India’s strong performance in auto components and select vehicle categories, alongside underexploited potential in passenger vehicles within the USD 2.2 trillion global automotive market.
From an FTA perspective, the automotive chapter illustrates how preferential access alone is insufficient without parallel improvements in competitiveness, standards alignment, and integration into global value chains. FTAs, in this sense, function as enablers but only where domestic capabilities are aligned with global standards.
Policy Implications for Future FTAs
The Trade Watch Quarterly implicitly calls for a recalibration of India’s FTA strategy, shifting the focus from coverage to performance. Key policy signals include:
- The need to sequence FTAs alongside industrial and supply-chain policies, rather than treating them as standalone trade instruments.
- Greater emphasis on tariff rationalisation and two-way trade, ensuring that imports support competitiveness rather than displacing domestic production.
- Aligning FTA outcomes with broader manufacturing and services competitiveness.
The report also underscores the importance of execution capacity, both at the policy and firm levels, in determining whether FTAs translate into sustainable export gains.
What the Quarterly Does Not Address
While the report provides a granular assessment of FTA-related trade outcomes, it does not delve into renegotiation timelines, safeguard mechanisms, or investment chapters within FTAs. Its focus remains on trade performance rather than treaty design, leaving open questions about how future agreements will incorporate lessons from current deficits.
Overall Assessment
The Q1 FY26 Trade Watch Quarterly presents a nuanced view of India’s FTA experience. The sharp rise in the trade deficit with FTA partners serves as a warning against assuming automatic gains from preferential access, while sectoral successes highlight where FTAs can work when backed by competitiveness and scale.
For policymakers and stakeholders, the message is clear: FTAs must be embedded within a broader strategy of production upgrading, value-chain integration, and execution discipline. As India continues to negotiate and recalibrate its trade agreements, the effectiveness of FTAs will depend less on their number and more on how well they align with domestic capabilities and long-term trade objectives.