India is undergoing a significant shift in its approach to global trade, moving beyond a reliance on cost competitiveness to a strategy focused on securing market access and integrating into global supply chains. This repositioning, driven by a series of recently inked trade agreements, is reshaping the country’s economic outlook and influencing capital flows, according to analysis of recent economic data and trade partnerships.
From Vulnerability to Capability
For years, India’s trade strategy was largely defined by its structural current account deficit, fueled by imports of energy and electronics. The focus was on managing this deficit rather than aggressively pursuing export-led growth. However, recent engagements with major economic blocs – including the United States, the United Kingdom and the European Union – signal a departure from this cautious approach. India is now negotiating from a position of capability, leveraging its growing industrial and services sectors to demand more favorable trade terms.
This shift is particularly evident in the recently finalized Free Trade Agreement (FTA) with the European Union, described as a “mother of all deals” by some observers. The agreement provides preferential market access for most Indian exports to a large and affluent consumer market, strengthening export visibility and industrial scale. The EU, comprising major industrial powerhouses like Germany, France, and Italy, represents a crucial partner in India’s ambition to become a more significant player in global production networks.
Tariff Alignment and Export Competitiveness
A key element of this new strategy is improved tariff alignment with major trading partners. Even small tariff differences can significantly impact sourcing decisions, and India’s earlier disadvantage in this area has been a constraint on its export potential. The narrowing of this tariff gap, particularly with the US, is now allowing Indian exporters to compete on more equal terms. In labor-intensive sectors like textiles and leather, where cost margins are tight, this improved parity is proving particularly beneficial.
The impact extends beyond traditional manufacturing. India’s electronics sector, once dominated by imports, is rapidly emerging as a major production hub. Electronics exports have climbed to levels of USD 48.2 billion, rising from seventh to third among India’s export categories. This transformation highlights the potential for export-led growth to diversify the Indian economy and reduce its reliance on imports.
Impact on Capital Flows and Market Valuations
The increased clarity surrounding trade agreements is already having a positive impact on investor sentiment. Renewed Foreign Institutional Investor (FII) inflows of approximately USD 1.7 billion have been observed, demonstrating how trade visibility influences capital allocation decisions. Stronger export momentum is, in turn, shaping earnings quality and market valuations.
Export-oriented businesses generally exhibit better earnings visibility and benefit from currency support during periods of rupee weakness. This represents reflected in the premium valuations assigned to sectors like IT and pharmaceuticals, which trade at higher price-to-earnings (P/E) ratios compared to more domestically focused, commodity-cyclical industries. Nifty IT currently trades at 24-25x P/E, while Nifty Pharma is around 30x.
Addressing the Current Account Deficit
For an economy managing a current account deficit, strong export growth is crucial for reducing dependence on volatile capital flows. Increased exports strengthen foreign exchange reserves, support currency stability, and enhance macroeconomic credibility – factors that are highly valued by investors. While FPI flows into Indian equities have been volatile recently, with net outflows of USD 17-18 billion in due to tightening global liquidity and rising US yields, the underlying trend towards export-led growth provides a buffer against external shocks.
A Strategic Repositioning
India’s shift towards competitiveness-led integration is timely, coinciding with a period of significant realignment in global supply chains. The country’s trade agreements are not merely about securing market access; they are about improving export competitiveness, strengthening foreign exchange management, and enhancing India’s attractiveness as a global manufacturing and services partner.
The agreements collectively signal India’s ambition to lead, compete, and be recognized as one of the world’s most open, dynamic, and forward-looking economies. The message is clear: global markets are opening to India, and the country is poised to capitalize on this opportunity. While India’s export-to-GDP ratio remains at approximately 21%, below that of several other Asian manufacturing economies, the potential for growth remains substantial. Sustaining high growth while managing external stability will require continued commitment to trade integration and a focus on enhancing export competitiveness.