India’s merchandise trade deficit narrowed to $20.67 billion in March — the smallest gap since June 2025 — but the improvement masks rising risks from the ongoing conflict in West Asia and resulting disruptions to key trade routes, according to analysis by Wan of MUFG.
Headline numbers and composition shifts
Official data show that India’s imports fell to $59.59 billion in March, a drop that outpaced the decline in exports to $38.92 billion. The resulting contraction in the deficit is being driven less by domestic strength and more by a sharp shift in what India buys and where it sells.
Lower energy and petroleum imports, particularly in liquified petroleum gas, were identified as early signs of an external shock to India’s trade flows. At the same time, gold prices and imports eased, further compressing the import bill and adding to the apparent improvement in the balance.
Impact of West Asia conflict on trade routes
Wan’s analysis argues that these shifts stem directly from the Middle East conflict, which has disrupted trade channels and slowed momentum in several sectors. Shipping through critical waterways has been hit, forcing cargo rerouting and longer journeys.
This disruption contributed to a steep 35.8% year‑on‑year fall in India’s imports of crude oil and related products in March. The reduction in energy shipments has helped narrow the deficit in the short term but reflects a broader slowdown in trade activity rather than a structural strengthening of the external position.
Sharp decline in trade with Gulf partners
The fallout is most visible in commerce with traditional Gulf partners. Exports to the United Arab Emirates fell 61.93% in March from a year earlier, while shipments to Saudi Arabia dropped 45.67% over the same period.
These figures highlight a meaningful shift in export destinations during the first month of the new quarter and underline how regional tensions are reshaping India’s trade map.
Rising energy prices and macro risks
Despite lower import volumes, India’s crude oil import price has climbed to a multi‑year high of about $125.88 per barrel in April. Wan notes that any further escalation in geopolitical tensions could quickly alter India’s inflation path and fiscal outlook.
Sustained high crude prices could add as much as $70 billion to India’s annual import bill, creating pressure on the currency and complicating monetary policy decisions. For traders, this raises the stakes around monitoring global energy markets and policy signals from New Delhi.
Supply chain stress and longer transit times
Beyond energy, the rerouting of vessels around conflict-affected sea lanes is adding up to two weeks to shipping times. These delays are likely to increase price volatility for non‑oil imports such as fertilizers, iron ore, and other industrial feedstocks sourced from the Gulf.
Companies dependent on just‑in‑time inventory models face growing uncertainty as logistical bottlenecks threaten to create intermittent shortages, higher carrying costs, and more erratic delivery schedules.
Trade diversion toward Western markets
As sales to the Middle East weaken, exporters are seeking alternative markets. Shipments to the United States rose 17.4% month on month in March, partly offsetting declines to Gulf partners.
This redirection of trade flows could support sectors with established demand in Western economies, but it also exposes exporters to new competitive dynamics and potential regulatory risks in those markets.
Outlook: continued volatility expected
Commerce Secretary Rajesh Agrawal has cautioned that April is likely to remain challenging for trade, indicating that the near‑term environment will stay volatile.
For traders, the message from Wan’s analysis is that India’s narrower deficit should be viewed with caution: it reflects conflict‑driven supply adjustments and shipping disruptions rather than a durable improvement in the country’s external fundamentals.
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