India’s economic relationship with Japan is becoming increasingly asymmetric. While Japan remains one of India’s closest strategic partners and a major investor, the merchandise trade gap between the two countries has widened sharply over the past decade.
Government trade data show India’s trade deficit with Japan expanded from US$5.18 billion in FY2015-16 to US$15.4 billion in FY2025-26. During the same period, imports from Japan more than doubled from US$9.8 billion to US$21.43 billion, whereas India’s exports increased only modestly from US$4.6 billion to US$6 billion.
The widening gap has prompted New Delhi and Tokyo to accelerate the review of the India-Japan Comprehensive Economic Partnership Agreement (CEPA), which has been in force since 2011. The objective is not merely to increase trade volumes but to address long-standing structural bottlenecks that have limited India’s export growth.
Why Exports Lag
The trade imbalance reflects differences in the composition and competitiveness of the two economies.
Japan exports high-value manufactured goods to India, including machinery, electrical equipment, industrial components and automobile parts that support India’s expanding manufacturing base. India, meanwhile, exports relatively lower-value products such as petroleum products, seafood, iron and steel, chemicals and textiles.
According to officials quoted by The New Indian Express, stringent sanitary and phytosanitary (SPS) regulations, demanding quality standards and technical compliance requirements continue to constrain Indian exporters’ access to the Japanese market.
The recent suspension of fresh mango imports from India following concerns over treatment procedures illustrates how non-tariff barriers can disrupt agricultural exports even under a free trade agreement.
The impact is visible in recent trade numbers. India’s exports to Japan declined 3.36% in FY2025-26, reversing the 21.2% growth recorded in FY2024-25. While annual fluctuations are common, they also highlight the difficulty Indian exporters face in sustaining growth in one of the world’s most quality-conscious markets.
Importantly, the widening trade deficit should not automatically be interpreted as a failure of CEPA. Bilateral trade balances are shaped by industrial capabilities, consumer demand, exchange rates and global supply chains in addition to tariff structures.
Investment Takes Centre Stage
Recognising these structural realities, India appears to be placing greater emphasis on attracting Japanese investment rather than focusing solely on narrowing the bilateral trade deficit.
Japan remains one of India’s most significant long-term investors. Between April 2000 and June 2025, cumulative Japanese foreign direct investment reached US$44.97 billion, making Japan India’s fifth-largest source of FDI. Annual inflows remained resilient at US$3.1 billion in FY2023-24, US$2.48 billion in FY2024-25, while investments touched US$3.2 billion during April-December FY2025-26.
The strategy gained fresh momentum during the recent India-Japan summit, where Japan reiterated its intention to raise its investment in India to more than US$61 billion by 2035. The two countries also agreed to expedite the review of CEPA and deepen cooperation in advanced manufacturing, semiconductors, clean energy, artificial intelligence and critical minerals.
For policymakers, these investments may ultimately prove more valuable than a short-term improvement in the trade balance. Capital inflows into manufacturing and technology-intensive sectors can strengthen domestic production capacity, create employment and gradually improve India’s export competitiveness.
A Broader Strategic Partnership
Trade is only one pillar of the India-Japan relationship. Bilateral merchandise trade reached US$27.5 billion in FY2025-26, but cooperation increasingly extends to infrastructure, resilient supply chains, defence technologies and energy security.
Japan has played a central role in financing major infrastructure projects in India, including the Mumbai-Ahmedabad High-Speed Rail corridor, while Japanese companies continue to expand their manufacturing footprint across automobiles, electronics and industrial machinery.
This broader strategic alignment explains why both governments are approaching the CEPA review as an opportunity to modernise economic cooperation rather than simply renegotiate tariff concessions.
Looking Beyond The Deficit
A widening bilateral trade deficit is a legitimate policy concern, but it does not fully capture the strength of an economic partnership.
For India, the larger challenge is improving its ability to compete in high-value manufacturing and meet the exacting standards required by developed markets such as Japan.
If the ongoing CEPA review succeeds in reducing non-tariff barriers while encouraging greater Japanese investment in sectors such as semiconductors, electronics and clean energy, it could strengthen India’s industrial base over the long term.
Whether that eventually narrows the trade deficit remains uncertain. However, deeper investment, technology transfer and supply-chain integration are likely to generate broader economic gains than focusing on trade balances alone.
The next phase of the India-Japan partnership will therefore be judged less by the size of the deficit and more by whether both economies can build a more resilient and mutually beneficial production ecosystem.
The Logical Indian’s Perspective
India’s widening trade deficit with Japan highlights that strong diplomatic ties alone do not guarantee balanced economic outcomes. Addressing structural barriers, improving product quality, and enhancing manufacturing competitiveness are as important as signing trade agreements.
As India and Japan review their free trade pact, the focus should remain on creating opportunities that benefit businesses, workers and consumers in both countries. Sustainable growth will depend on fair market access, deeper investment, technology transfer and long-term industrial collaboration rather than trade balances alone.
