Can Budget fix the damage trade protectionism has done to India’s exports?
After a decade of inward trade policy, exports are lagging GDP growth; the FM faces pressure to reset trade policy and reconnect India to global value chains
Come Sunday, and Union Finance Minister Nirmala Sitharaman will lay out her vision for the coming fiscal year, outlining strategies and allocations aimed at driving economic growth across multiple fronts.
For the Indian economy, export is the third growth engine after consumption (Private Final Consumption Expenditure, or PFCE) and capex (Gross Fixed Capital Formation, or GFCF). It averaged 21.9 per cent of GDP during FY12-FY26 (Advance Estimates, AE). But, its ‘real’ growth averaged 5.5 per cent during FY13-FY26 (AE), below the 6.2 per cent ‘real’ GDP growth in the same period.
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Which means, for India at present, the export engine is a drag on growth. The following graph maps the export and GDP growth numbers since FY13.
Former Chief Economic Advisor Arvind Subramanian and economic expert Shoumitro Chatterjee were the first to flag that India was going backwards toward trade protectionism after 2014, arguing that the shift defied both economic logic and empirical evidence.
In a policy paper published in 2020, they wrote: “Real export growth of goods and services averaged close to 11 per cent between 1992 and 2019, more than double the 4.5 per cent rate recorded between 1952 and 1991. And, overall GDP growth rates were 6.5 per cent and 3.5 per cent, respectively, in these two periods.”
How did India go there?
The shift back to trade protectionism did not occur overnight. It happened over the years, across multiple points. We trace some of the milestones here.
India gradually went back to failed protectionism from 2014, largely to 'shield' the domestic industry from foreign competition. It quietly raised tariff walls, later branding it as a move toward Atmanirbhar Bharat. Then came the anti-dumping duties targeting China, South Korea and Vietnam
In 2023, Quality Control Orders (QCOs) were issued to check imports from China (345 products). Despite knowing the poor quality ecosystem and capabilities, 84 such orders were issued. Subramanian and Chatterjee were, again, the first to seek their elimination in March 2025 for hurting trade.
Former NITI Aayog CEO Amitabh Kant wrote days later to say those were “restricting” the import of cheaper, critical raw materials, thereby damaging textile exports.
Export engine stalled
These changes stalled the export engine because restricting imports of raw materials, intermediaries, and components compromises the quality of exported products.
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It was such restrictions that provoked US President Donald Trump to impose a 25 per cent ‘reciprocal’ tariff last year, forcing India to gradually dismantle it. Beginning with the 2025 Budget, India cut down tariffs, first for the US, then for the UK, during the FTA negotiations. Now, it's offering to trim tariffs for others, too.
Shunning of multilateral FTAs
In 2017, India unilaterally cancelled 68 bilateral investment treaties (BITs) linked to bilateral Free Trade Agreements (FTAs). It also began renegotiating all bilateral FTAs to check the growing trade deficit, which was endorsed by a 2018 NITI Aayog report and the Economic Survey of 2021-22. 4. The same protectionist instincts led India to shun multilateral FTAs.
It kept away from the Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) in 2018, pulled out of the Regional Comprehensive Economic Partnership (RCEP) in 2019 and kept out of the trade pillar of Indo-Pacific Economic Framework (IPEF) in 2022. These blocs account for most of the global GDP and trade. India chose bilateral FTAs over multilateral FTAs without realising that multilateral FTAs are superior instruments since they offer one template for tariff and governance for multiple items with multiple markets at once. Besides, skipping multilateral FTAs means skipping global value chains (GVCs).
Missing the China+1 bus
India didn’t gain much from global MNCs’ China+1 strategy (post-2018). Most shifted to the Regional Comprehensive Economic Partnership (RCEP) countries (“friend-shoring”) or back to the US and nearby countries (“near-shoring”). China is setting up shop in Mexico and other Latin American countries to access the US and Turkiye markets, and Nigeria and Morocco to access the European market.
A parliamentary panel report of 2021 lamented that India didn’t track the developments and it “learnt through media reports” that most MNCs had friend-shored to the RCEP.
India has persuaded many MNCs to set up units for smartphones and semiconductors through subsidies (PLIs and DLIs). But these are mostly assembling plants with low value additions.
A Global Trade Research Initiative (GTRI) report of 2025 said value-addition on iPhones, solar panels, diamonds, and petrochemicals is so low that “after accounting for PLI incentives and other concessions, the real earnings are close to zero”. That is, high export values of smartphones translate to little net gain.
The way forward
The diagnosis above makes it clear that India needs to fully dismantle protectionism, join multilateral FTAs and GVCs, incentivise R&D-driven manufacturing instead of subsidies and adopt evidence-based policies.
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India’s trade deficit, the cause for renegotiating FTAs, is relatively benign because of the surplus services exports generate, even as goods exports generate massive deficits – as the following graph shows. For example, during April-December 2025, deficit from goods trade was (-) $248 billion, but the surplus from services trade reduced it to (-) $96.6 billion. Yet, India doesn’t publish disaggregate data, has no separate ministry and very few incentive schemes for services exports, unlike for goods exports.
Focus on improvement
Trade deficit must be delinked from FTAs as poor exports reflect lack of competitiveness of domestic products, lack of high-tech capabilities and resources (probably why it was kept out of ‘Pax Silica’ earlier). The focus should shift to improvement in those areas.
The current trade logjam with the US and the now-on-now-off trade and diplomatic relations with major powers like China and Russia point to an urgent need for a clear vision, long-term plans and strategies, not an ad hoc and piecemeal approach to either trade or diplomacy.
Will Madam Finance Minister deliver?
Coming soon: What Budget can do to boost capex
