Ongoing trade negotiations with the United States are expected to conclude during the year, the Economic Survey said, adding that the US move to impose 25% punitive tariff on Indian merchandise in August 2025 on top of a 25% reciprocal tariff “surprised many” since India was expected to be one of the early winners in the new tariff regime.
Although the US President announced reciprocal tariffs of 25% on India in April, India was expected to strike an early agreement with the US administration and lower them. “So, in August, when the American President announced an additional penal tariff of 25% on most of India’s merchandise exports to the United States on top of the reciprocal tariff of 25% announced in April, it surprised many since India was expected to be one of the early winners in the new tariff regime of the United States,” it said.
“Growth forecasts were revised downward. But in reality, growth accelerated due to a slew of structural reforms and policy measures,” it added. Negotiations for the India-US bilateral trade agreement (BTA) were launched after the leaders meeting in mid-February 2025. While negotiations were on, the Trump administration imposed a 25% retaliatory tariff on Indian goods. Later, another 25% punitive tariff was levied for India meeting its energy requirements by purchasing Russian crude. Cumulatively the 50% additional tariff is one of the highest levies on merchandise exports from any US trading partner.
The survey said that India’s trade diversification strategy helped from geopolitical volatilities and tariff shocks. “In the first half of FY26, exports of goods and services grew by 5.9 per cent, exceeding the growth seen in the same period last year, and remaining above the pre-pandemic average, supported by trade diversification,” it said.
Services exports have continued to provide a stable anchor for growth, partially offsetting the greater volatility in goods exports, amid tariff related uncertainties, it said. The implicit second half of the financial year (H2) estimate for exports of goods and services suggests that trade activity is likely to remain resilient, it said.
India’s total exports reached record levels of $825.3 billion in FY25 and $418.5 billion in H1 FY26, driven by strong growth in services exports and sustained momentum in non-petroleum, non-gems, and jewellery exports. “The expansion of higher-value manufacturing exports, especially in electronics, pharmaceuticals, and electrical machinery, along with diversification of export destinations and import sources, has strengthened resilience amid rising protectionism and tariff uncertainties,” the survey said.
The services trade surplus remains a key stabilising factor, consistently offsetting a large portion of the merchandise trade deficit, supported by strong growth in software, business services, and the expanding role of Global Capability Centres (GCCs), it added
It hoped for a positive outcome of the India-US trade deal, while endorsing India’s trade diversification strategy. “Looking ahead, export momentum is expected to strengthen, supported by advancing bilateral trade negotiations with the United States, trade agreements with other major economies, and continued efforts to diversify export markets,” it said.
India has recently concluded negotiations for “mother of all FTAs” with the European Union, integrating two markets with a combined GDP of approximately $25 trillion with 1.9 billion population. The latest deal came close on the heels of the India-UK FTA and the four-nation European Free Trade Association (EFTA) bloc – together a $30 trillion-plus integration.
The survey lauded policy efforts to boost manufacturing through schemes like production linked incentive (PLI), but suggested to go beyond import substitution for long-term, sustained growth. “The next phase of industrialisation will require a calibrated shift from a model centred mainly on import substitution towards one focused on scale, competitiveness, innovation and deeper integration into GVCs,” it said.
“Rather than seeking complete self-reliance in every segment, India needs to build strategic resilience through diversification and creating depth of capabilities. This requires an increase in private sector investment in R&D, technology adoption, skills, and quality systems. MSMEs will be crucial in this journey, evolving from micro-scale production toward deeper participation in formal and export-linked supply chains,” it added.
India’s policy challenge does not stop with institutional reform for achieving import substitution or Swadeshi, or domestic industrial policy, and doing it intelligently in terms of making the industry meet world standards, it said.
“India also needs to build domestic capacity in areas that would make it strategically resilient. Strategic resilience is about building buffers and strengths to withstand external shocks. It means investment in national strength,” it said.
Intelligent Import Substitution is the first step in investing in national strength. ‘Investment in national strength’ takes us to the next stage of ‘strategic resilience’ and then to the final stage of ‘strategic indispensability,’ it said.
