India's Trade Deficit Hits $27.1B as Iran War Looms

Introduction

India's merchandise trade deficit widened significantly to $17.1 billion in February 2026, nearly double the figure from the previous year. While this marked a slight improvement from January, the data precedes the full economic impact of the escalating conflict in West Asia, which began on February 28 and now casts a long shadow over the country's economic stability.

February's Trade Imbalance

The year-on-year gap was driven by a 24% surge in imports, primarily led by increased purchases of gold and silver. In contrast, merchandise exports saw a marginal decline of 0.81% to $16.61 billion. On a month-on-month basis, the deficit showed a narrowing from January's $14.68 billion, largely due to a moderation in gold imports. However, the February 2026 deficit remains substantially higher than the $14.42 billion recorded in February 2025, highlighting persistent external pressures on the economy.

The Looming West Asia Crisis

The conflict involving the US, Israel, and Iran, which started at the very end of February, is the primary concern for the coming months. Its economic repercussions are not fully captured in the latest trade figures. The blockade of the Strait of Hormuz has already caused crude oil prices to spike by nearly 43%, with analysts forecasting a potential rise to $150 per barrel. This is a critical vulnerability for India, which imports approximately 85% of its crude oil requirements.

Impact on Global Shipping and Logistics

The conflict has immediately disrupted global supply chains. According to reports, shipping capacities to Europe and the United States have fallen by 30-35% of their normal levels. Indian exporters are now forced to reroute shipments, leading to longer transit times and a sharp increase in freight and insurance costs. Commerce Secretary Rajesh Agrawal acknowledged these logistical bottlenecks, stating that March would be a difficult month for exporters.

Key Trade Data Summary

Divergent Export Trends

A closer look at the export basket reveals a mixed performance. While core exports, including engineering goods and electronics, showed growth, petroleum product exports plummeted by about 40% year-on-year. This decline is attributed to India prioritizing domestic energy needs amid rising global uncertainty. Trade with key partners also saw significant shifts. Exports to the United States fell by 12.9% year-on-year, with shipments to the UAE and the UK also declining. In a notable contrast, exports to China surged by 32.4%, continuing a trend of double-digit growth.

Widening Deficit with China

The data for the first 11 months of the fiscal year (April-February) shows India's trade deficit with China has expanded to $102 billion, a significant increase from the $11 billion recorded in the same period of the previous year. This growing imbalance remains a key structural issue for India's trade policy.

Broader Economic Consequences

The combination of a higher trade deficit and rising oil prices is expected to exert considerable pressure on India's Current Account Deficit (CAD). Analysts have warned that if the conflict is prolonged, India's CAD could widen to between 2.5% and 3% of GDP. This, in turn, increases the nation's external vulnerabilities. The Indian rupee has already started depreciating, and rising import costs are fueling concerns about domestic inflation, which could increase the cost of living for households.

Services Sector Provides Some Relief

A partial offset to the widening merchandise trade gap comes from the services sector. Provisional data for February indicated a services trade surplus of $13.2 billion. While these figures are subject to revision by the Reserve Bank of India, the consistent surplus from services provides a crucial cushion for the overall balance of payments.

Conclusion and Forward Outlook

While the narrowing of the trade deficit from January offers a sliver of positive news, the overall picture is dominated by caution. The February data serves as a baseline before the full economic shockwaves of the Iran war hit. With rising energy prices, disrupted shipping routes, and a depreciating rupee, the trade figures for March are expected to reflect these significant challenges. The government has indicated it plans to announce measures to support exporters, but the path ahead remains turbulent and heavily dependent on geopolitical developments in West Asia.