India’s Trade Diversification Push

• 06 Feb 2026

This editorial is based on “Lower US tariffs help India, but diversification remains essential” which was published in The Hindu on 03/02/2026. The article brings into picture the short-term gains from US tariff relief for India, while underscoring the need to sustain export diversification and domestic resilience amid policy uncertainty.  

For Prelims: India–US Trade Deal 2026, Union Budget 2026–27 , KABIL (Khanij Bidesh India Ltd),  European Union, Free Trade Agreement, India-Middle East-Europe Corridor , Gulf Cooperation Council,  India Oman CEPA, Carbon Border Adjustment Mechanism (CBAM). 

For Mains: Key Drivers Pushing India to Diversify its Trade Market, Key Issues Associated with India’s Market Diversification Move.

India has secured significant tariff relief from the US, with reciprocal tariffs reduced from 25% to 18% and the additional 25% penalty on Russian oil imports lifted. While this provides immediate relief to exporters and capital markets, the agreement came after India had already begun aggressively diversifying its export markets and pursuing trade deals with partners like the EU. India must continue strengthening alternative markets and building domestic resilience rather than becoming overly dependent on US trade concessions.

What are the Key Drivers Pushing India to Diversify its Trade Market? 

• The "Weaponization of Trade" & US Volatility: The primary propellant is the realization that the US market is no longer a "stable anchor" but a geopolitical lever that can be switched off arbitrarily.  
  • The recent tariff shock demonstrated that political alignment (Quad) does not guarantee economic immunity, forcing India to "hedge" its export bets. 
  • For instance, India's merchandise exports to the US slipped 1.83% year-on-year to $6.88 billion in December 2025, weighed down by higher tariffs (though it has eased recently) 
• The "Critical Mineral" Security Imperative: Diversification is now driven by the "input side”, the urgent need to secure lithium, cobalt, and rare earths to feed India's domestic PLI ecosystems (EVs, semiconductors) without relying on China.  
  • This has forced a foreign policy pivot toward mineral-rich nations in Africa and Latin America, transforming them from just "export destinations" into strategic "resource partners." 
  • Union Budget 2026–27 announces Dedicated Rare Earth Corridors in Odisha, Kerala, Andhra Pradesh, and Tamil Nadu for mining, processing, research, and manufacturing of Rare Earth Permanent Magnets (REPMs), bypassing Chinese processing. 
    • Also, to operationalise its strategy internationally, India established the KABIL (Khanij Bidesh India Ltd) joint venture, comprising NALCO, HCL and MECL, which is tasked with identifying, exploring and acquiring critical minerals. 
• Capturing the "Growth Arbitrage" of the South: Strategically, India is moving where the future consumption is, realizing that Western markets are demographically stagnant while the Global South is entering a consumption boom. 
  • By establishing early dominance in these "youth-bulge" economies with affordable goods (pharma, 2-wheelers), India is effectively locking in the next 20 years of export demand. 
  • According to UNCTAD's Trade and Development Report 2025, India ranked among the leading economies in trade partner diversification, ranking 3rd in the Global South and recording a trade diversity score higher than all Global North economies. 
• The "Green Energy" Export Imperative: India’s ambition to become a global Green energy hub forces a structural pivot away from the energy-rich US (which has its own cheap shale/IRA subsidies) toward energy-importing economies in East Asia and Europe.  
  • To monetize its renewable cost advantage, India is trying to aggressively cultivate markets like Japan, South Korea, and Germany. 
  • For instance, India's exports of solar photovoltaic (PV) products have surged by more than 23 times between Fiscal Year (FY) 2022 and FY2024. 

How is India Diversifying its Trade Markets? 

• Strategic Anchoring in Non-US Western Markets: India is aggressively hedging against US policy volatility by locking in long-term, duty-free access to other high-value consumption economies in Europe and the UK.  
  • This "multiple-anchor" strategy ensures that even if American tariffs fluctuate, Indian exporters have alternative premium markets for high-margin goods like textiles and leather. 
  • For instance, in January 2026, India and the European Union concluded negotiations for a comprehensive Free Trade Agreement (FTA), covering 99% of India's export trade. 
• Moving Up the Value Chain via PLI: The diversification is not just geographic but structural, shifting the export basket from raw commodities to high-value finished electronics and precision engineering through the Production Linked Incentive (PLI) scheme.  
  • By embedding itself into Global Value Chains (GVCs) as a "Plus One" partner, India makes its exports stickier and less sensitive to simple price/tariff shocks. 
  • For instance, India's electronics exports hit ₹4 lakh crore in 2025, with further growth expected as four semiconductor plants begin production in 2026. 
• The "Global South" Geographic Pivot: Recognizing saturation in the West, New Delhi is actively cultivating markets in Africa, Latin America, and Central Asia to absorb mid-tech manufacturing and generic pharmaceutical exports.  
  • This pivot taps into high-growth developing economies where Indian goods offer a "value-for-money" competitive advantage over expensive Western alternatives. 
  • For instance, Indian companies already account for about 20% of pharmaceutical exports to Africa, highlighting their critical role in the region’s healthcare system. 
    • India’s total trade with Latin American and Caribbean region, comprising of 43 countries, stood at USD 35.73 billion with exports worth USD 14.50 billion during 2023-24 
    • Also, recently, India and the Gulf Cooperation Council (GCC) have signed the Terms of Reference for a Free Trade Agreement in New Delhi. 
• Currency Statecraft & De-Dollarization: To insulate its trade from geopolitical weaponization of the US Dollar and exchange rate volatility, India is operationalizing Rupee trade settlement mechanisms and digital payment linkages.  
  • This financial infrastructure allows trade to continue with sanction-hit or forex-starved nations without triggering US secondary sanctions. 
  • For instance, in 2023, India has made first-ever payment in rupees for crude oil purchased from the UAE, paving the way for the Internationalization of Indian Currency. 
    • Also, UPI-PayNow linkages with Singapore now process real-time cross-border trade settlements. 
• Energy & Logistics Corridor Diplomacy: India is reducing its logistics vulnerability by developing physical trade corridors like the India-Middle East-Europe Corridor (IMEC) and securing energy from diverse sources (e.g, LNG from Qatar).  
  • This reduces the "transit risk" of relying solely on the Suez Canal or volatile shipping lanes, ensuring supply chain continuity for exporters. 
  • For instance, the India Oman CEPA anchors India’s logistics presence in the Gulf.  
    • Also, FY 2025-26 saw logistics costs coming down to 7.97% of GDP. This is a substantial decline from the previously cited, long-standing figures of 13-14%. 
• The "Investment-First" Trade Model (EFTA): Moving beyond traditional tariff-for-tariff deals, India is pioneering "investment-linked" trade pacts like the TEPA with EFTA nations to secure technology transfers and long-term capital. 
  • This strategy reduces vulnerability to goods-export volatility by locking in massive Foreign Direct Investment (FDI) that builds domestic industrial capacity for global export markets. 
  • For instance, under the TEPA agreement, there is a commitment to invest $100 billion in India over a 15-year period. 

What are the Key Issues Associated with India’s Market Diversification Move?  

• The "Green Wall" of Non-Tariff Barriers: Diversifying into high-value Western markets like the EU is colliding with "Green Protectionism" tools like the Carbon Border Adjustment Mechanism (CBAM) and Deforestation Regulation (EUDR).  
  • These rigorous compliance standards disproportionately hit India's MSME-dominated export base, threatening to erode the cost arbitrage that Indian exporters rely upon to compete with Vietnam or Bangladesh. 
  • Although the recent India–EU FTA includes a forward-looking MFN clause on CBAM, ensuring that any future exemptions or flexibilities granted by the EU to other partners will also apply to India, its implementation remains uncertain. 
• The "Import-Dependent Export" Trap: The pivot to electronics and engineering exports is structurally fragile because it relies heavily on assembly rather than deep component manufacturing.  
  • This "shallow" diversification creates a paradoxical vulnerability: boosting exports to the US or EU automatically spikes component imports from China, deepening the trade deficit with Beijing despite political decoupling efforts. 
  • For instance, Domestic value addition (DVA) in India's mobile phone manufacturing sector is just 23%. Conversely, over the last 15 years, China's share in India's industrial product imports has increased significantly, from 21% to 30%, creating a "sovereign risk" in critical supply chains. 
• Logistics Inefficiency in Price-Sensitive Markets: While India seeks to capture "Global South" markets in Africa and Latin America, its high logistics costs make it uncompetitive against China’s mature Belt and Road infrastructure.  
  • Without seamless connectivity, Indian goods suffer margin erosion, making it difficult to displace entrenched Chinese suppliers in these price-sensitive geographies. 
  • Also, China's infrastructure and debt-driven influence contrasts with India's market-oriented, partnership-focused investments in East Africa. 
• Asymmetric FTA Utilization & Deficits: The strategy of signing rapid FTAs (UAE, Australia, EU) faces a "utilization gap" where Indian exporters struggle with complex Rules of Origin (ROO) compliance while partner nations easily dump finished goods.  
  • This asymmetry often widens the trade deficit post-deal, as Indian manufacturing lacks the scale to fully exploit duty-free access compared to partner capabilities. 
  • India's FTA utilisation remains very low at around 25%, while utilisation for developed countries typically sits between 70–80%. 
• Isolation from Regional Value Chains (RCEP): Critics argue that by opting out of RCEP to protect domestic dairy/agriculture, India effectively isolated itself from the world’s largest friction-free manufacturing zone.  
  • This exclusion forces Indian exporters to pay tariffs that competitors like Vietnam do not, incentivizing MNCs to bypass India for final assembly in RCEP nations to serve the massive East Asian market. 
  • For instance, Vietnam's textile and garment industry is on a strong recovery trajectory, with export revenues  forecast to hit $46 billion in 2025, directly capturing market share India ceded. 
• Policy Volatility & "Reliability Risk": India’s recent abrupt export bans on essential commodities (rice, onions) to control domestic inflation significantly damages its reputation as a reliable partner for "Global South" nations.  
  • This "switch-on, switch-off" policy volatility forces African and Gulf importers to sign long-term contracts with predictable rivals like Thailand or Brazil, neutralizing India's geographic advantage. 

What Measures can India Adopt to Ensure Sustainable Diversification Amid Tariff Uncertainties? 

• Institutionalizing Mutual Recognition: Instead of passively reacting to Western non-tariff barriers, India must aggressively pursue "Mutual Recognition Agreements" (MRAs) for its Bureau of Indian Standards (BIS) certifications, particularly with Global South partners.  
  • By harmonizing regulatory frameworks with Africa and ASEAN, India can create a "standards-aligned" trade bloc that reduces compliance costs and immunizes exporters against arbitrary quality rejections, effectively creating a captive ecosystem for "Made in India" goods that Western rivals cannot easily penetrate. 
• The "Servicification" of Manufacturing Exports: To counter tariff volatility on physical goods, policy must incentivize the "embedding" of high-margin services, like remote diagnostics, AI-driven predictive maintenance, and software integration, into hardware exports.  
  • This "Product-as-a-Service" (PaaS) model increases client stickiness, bypasses standard goods tariffs, and leverages India’s software dominance to create a hybrid value proposition that low-cost manufacturing rivals like Vietnam or Bangladesh cannot structurally replicate. 
• Democratizing Exports via "Digital Public Infrastructure" (DPI): The government must rapidly operationalize "E-Commerce Export Hubs" (ECEHs) by integrating them with India’s Digital Public Infrastructure to offer seamless, automated customs clearance and pre-shipment credit for MSMEs.  
  • By lowering the entry barrier for small players to access global markets directly ("Direct-to-Global"), India can diffuse export risk across thousands of granular sellers rather than relying on a few large conglomerates, creating a "resilient distributed export network". 
• Strategic "Backward Integration" in PLI 2.0: Future iterations of the PLI scheme must pivot from rewarding final assembly to heavily subsidizing the production of "upstream" intermediate components like specialized chemicals, industrial wafers, and precision sub-assemblies.  
  • This "Deep Localization" strategy is the only way to break the "Import-Export Trap" with China, ensuring that every dollar of export growth translates into genuine domestic value addition and technological sovereignty rather than just "pass-through" trade. 
• A Proactive "Carbon Insetting" Framework: To neutralize the threat of the EU’s CBAM, India should implement a rigorous, globally accredited domestic carbon trading market that allows exporters to "inset" their carbon costs locally.  
  • By proving that carbon taxes have already been paid domestically (and reinvested in green transitions), exporters can claim exemptions abroad while financing the country's own energy shift, turning a compliance burden into a "Green Competitive Advantage". 
• Forging "Minilateral" Supply Chain Corridors: Moving beyond broad, slow-moving FTAs, India should forge specific, sector-focused "minilateral" pacts (e.g., a Critical Minerals Partnership with Australia) to secure supply chain immunity.  
  • These focused, high-trust corridors would prioritize "resilience over efficiency," ensuring that key strategic industries remain insulated from broader geopolitical shocks or trade wars by operating within "trusted geography" bubbles. 

Conclusion:

India’s trade diversification reflects a strategic shift from dependence on any single market to resilience through multiple anchors, value upgrading, and new geographies. While tariff relief and FTAs offer short-term gains, structural risks from policy volatility, non-tariff barriers, and shallow localization persist. Sustainable diversification will hinge on deep domestic value addition and secure supply chains. Ultimately, India’s goal must be to convert uncertainty into strategic autonomy, not temporary trade concessions. 

Drishti Mains Question:

Examine the rationale behind India’s strategy of diversifying its trade markets. Discuss the key drivers, challenges, and the measures required to ensure sustainable and resilient trade diversification for India. 

 

FAQ:

1. Why is India actively diversifying its trade markets? 
India is diversifying to reduce over-dependence on volatile markets like the US, hedge against trade weaponization, secure critical mineral supplies, and tap into high-growth demand in the Global South

2. How do recent trade agreements support India’s diversification strategy? 
FTAs with the EU, GCC, EFTA (TEPA), and others provide alternative market access, investment inflows, and technology transfers, reducing exposure to tariff shocks from any single partner. 

3. What role do critical minerals play in India’s trade strategy? 
Securing lithium, cobalt, and rare earths is essential for India’s EV, semiconductor, and green energy ambitions, prompting partnerships with mineral-rich regions in Africa and Latin America. 

4. What are the key challenges India faces in diversifying trade markets? 
Major challenges include non-tariff barriers like CBAM, low domestic value addition, high logistics costs, underutilization of FTAs, and policy unpredictability affecting export credibility. 

5. What measures can ensure sustainable trade diversification for India? 
India must deepen local manufacturing, align standards with partners, embed services into exports, leverage digital trade infrastructure, and build resilient, trusted supply-chain corridors. 

UPSC Civil Services Examination, Previous Year Questions (PYQs) 

Prelims

Q. Convertibility of rupee implies (2015) 

(a) being able to convert rupee notes into gold 

(b) allowing the value of rupee to be fixed by market forces

(c) freely permitting the conversion of rupee to other currencies and vice versa 

(d) developing an international market for currencies in India

Ans: (c) 

Q. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if (2018)

(a) Industrial output fails to keep pace with agricultural output.

(b) Agricultural output fails to keep pace with industrial output.

(c) Poverty and unemployment increase.

(d) Imports grow faster than exports. 

Ans: (c) 

Q. A “closed economy” is an economy in which (2011)

(a) the money supply is fully controlled

(b) deficit financing takes place

(c) only exports take place

(d) neither exports or imports take place

Ans: (d) 

---

Mains

Q. How would the recent phenomena of protectionism and currency manipulations in world trade affect macroeconomic stability of India? (2018)

Q. Evaluate the economic and strategic dimensions of India’s Look East Policy in the context of the post Cold War international scenario. (2016)