By Dhurjati Mukherjee
German Chancellor Fredrich Merz’s recent visit to India resulted in promising economic discussions. He assured Prime Minister Modi of progress on the European Union trade deal, while Germany formalized 19 defence and technology agreements. Eight other announcements seek to boost cooperation in areas like people-to-people contact, Indo-Pacific ties, green development, and visa-free transit for Indian passport holders through Germany.
A key outcome was the joint declaration of intent to strengthen bilateral cooperation, with Prime Minister Modi indicating that both parties will collaborate on a strategic roadmap aimed at enhancing defence industry partnerships and fostering new development opportunities. Additionally, four formal agreements were signed to advance cooperation in critical and emerging technologies, such as semiconductors and essential minerals. These memoranda of understanding are anticipated to invigorate trade relations and bolster collaboration between the two nations, which have a longstanding tradition of close partnership in commerce.
At same time, Spain, Germany, Belgium, and Poland are becoming reliable export markets for India in the EU, according to commerce ministry data. Spain saw a 56% increase in Indian exports, reaching $4.7 billion between April and November, while exports to Germany rose 9.3% to $7.5 billion. These figures show that India is diversifying its export strategy across Europe, achieving rapid growth in Spain, steady gains in Germany, and stability in Belgium, reflecting a balanced export profile combining market diversification from tradition markets, according to government officials.
There are also reports that in various other areas, exports are showing a healthy trend. Mention may be made regarding apparel exports to the U.K., Russia and Germany as Bangladesh is in a turbulent situation presently. If the trade deal with the EU is signed early, India may greatly make up for some loss that has happened as regards the US market.
Coming to China, New Delhi has rightly decided to openup the Indian economy. This would signify the consolidation of the bilateral relationship that had witnessed seismic shocks in the light of Chinese incursions on the Indian border. However, new shoots of calm have been sprouting for a while as last year both New Delhi and Beijing agreed upon a series of mechanisms to improve relations. It makes sense for India to develop closer trade relations with China and the EU.
As is generally agreed, an economic engagement with China is thus very much desirable. However, India’s trade gap with China is expected to exceed $100 billion in 2025 with exports estimated to improve last year but imports surged much faster from $87.7 billion in 2021 to $109.6 billion in 2024, according to data from the Global Trade Research Initiative. India’s domestic manufacturing sector remains heavily dependent on Chinese inputs and this makes even more sense to further our trade relations.
But despite encouraging trends in exports, the trade deficit widened, led by a sharper jump in imports, specially gold trade, as per data published by the commerce ministry. Exports stood at $38.51 billion, rising by 1.9% from a year earlier. The resilience was largely supported by India’s push into markets in West Asia and North Africa. Rise in imports, however, outpaced exports as it climbed by 8.8% in December from a year earlier to $63.55 billion. As a result, India’s trade deficit widened to $25.04 billion in December from $24.53 billion a month earlier. While the trade deal with the US has yet to be signed with 50% tariffs hanging over the country’s head, merchandise export reported a 9.75% year-on-year increase to $65.88 billion in the first nine months of the fiscal year.
If the trade deficit must be checked, India should give special focus on electronics and critical minerals to reduce dependence on China. In a major boost to electronics manufacturing, the Centre cleared 22 new proposals entailing investment of nearly Rs 42,000 crore. Investments under the Electronics Components Manufacturing Scheme (ECMS) produced Rs 2.6 lakh crore in the coming years and reduced reliance on imports.
In recent years, electronics manufacturing, including mobile phones, increased in the country but imports haven’t come down as the manufacturers rely on components produced in other countries, specially China. This should not happen and manufacturers should see and use Indian products and prove their worth. If this happens and China increases its imports from India and our imports are reduced, the trade gap will automatically be not so wide and glaring.
Apart from China, India economic relations with the UK, Australia, Germany, France, Israel, Brazil and some African countries are on strong foundation and expected to be enhanced. The Indo-Japan strategic dialogue held a few days back agreed to boost cooperation in AI and critical minerals while seeking enhanced engagement on issues related to South Asia, West Asia and Africa. Among the significant outcomes was a decision to establish a Japan-India AI strategic dialogue and to ramp up both private sectors and governments on issues related to economic security. Added to this, if the EU deal materialises within the next fortnight, this would give a further impetus as trade would open up with so many European countries.
At same time, with India taking up the leadership role in BRICS, it would help engage with all other and new members, specially, Egypt, Ethiopia and the UAE. India is also giving a thrust to increase trade with the African world, and this may help boost up exports.
Regarding attracting foreign direct investment (FDI), it is tragic that over the next decade, India dropped in the rankings for net FDI/GDP from 12th to 19th among the 25 largest emerging countries. While the net numbers have been depressed recently by foreigners repatriating past profits, gross profits are low too with India ranking below most emerging markets last year. India needs to attract much more foreign capital because its domestic savings pool is not sufficient to finance strong infra growth needs. Unlike many of the East Asian miracle economies, India has a weak manufacturing sector so it is difficult to become a weak export powerhouse.
In the past year, the government has introduced major reforms to reduce bureaucracy by streamlining labour codes, simplifying bankruptcy rules, and digitizing many public services. These changes are expected to encourage greater investment and stimulate economic growth. While foreign direct investment (FDI) plays a role, it is also important for domestic private investment—especially in manufacturing—to become more active, supported by favourable reforms. Promoting innovation and increasing both domestic and foreign investment are essential for boosting exports, driving broad-based growth, and creating new jobs.—INFA
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