In August 2025, India witnessed a modest narrowing of its merchandise trade deficit to $26.1 billion, down from $27.4 billion in July, according to a recent report from the Union Bank of India. This improvement occurred amid dynamic trade factors including a near doubling of gold imports and mounting challenges from escalating US tariffs targeting Indian exports.
Surge in Gold Imports Drives Trade Dynamics
Gold imports soared in August as buyers prepared for the traditional festive and wedding seasons, a period historically marked by increased demand for precious metals. Despite rising global gold prices, this influx sustained overall import levels, giving only mild relief to India’s trade balance. The seasonal surge underlines gold’s continued significance in India’s import basket and its influence on monthly trade figures.
US Tariffs Weigh Heavily on Indian Exports
Trade tensions between India and the United States remain a dominant factor impacting export growth. The US, accounting for about 20% of India’s merchandise exports, recently imposed a total 50% tariff on Indian goods after a breakdown in trade negotiations. The tariff escalation, effective from late August, specifically targets Indian imports of Russian oil and extends to a broad range of sectors including textiles, gems and jewelry, chemicals, and marine products.
This tariff increase threatens the viability of nearly $48 billion worth of Indian exports to the US, risking a sharp decline in shipments and significant economic implications for export-driven industries. Analysts estimate that these tariffs could reduce India’s US-bound exports by up to 40-45% in the fiscal year 2025-26.
Government Measures to Mitigate Impact
Responding to these challenges, the Indian government has taken steps to support exporters, including easing norms under the Advance Authorization Scheme. This relaxation allows duty-free imports of raw materials for export production, aiming to help domestic industries absorb the tariff shock. Additionally, authorities are encouraging diversification into alternative markets such as China, Latin America, and the Middle East to offset losses from the US trade disruption.
Outlook Remains Cautious Amid Global and Domestic Pressures
Despite these measures, the trade outlook remains challenging. Continued strong gold imports during the festive season, sustained energy demands, and reliance on imports of electronics and capital goods are expected to keep the trade deficit elevated in the short term. On the positive side, falling global commodity prices and import substitution efforts offer some potential for easing pressures.
The report highlights that any progress in India-US trade talks leading to tariff reductions would provide critical support for India’s export recovery, although near-term improvements appear limited. Until then, exporters must navigate a complex landscape shaped by tariff barriers and shifting global demand.
