diff --git a/changelogs/fragments/5735-terraform-init-fix-when-default-workspace-doesnt-exists.yaml b/changelogs/fragments/5735-terraform-init-fix-when-default-workspace-doesnt-exists.yaml
new file mode 100644
index 0000000000..3ec348aed9
--- /dev/null
+++ b/changelogs/fragments/5735-terraform-init-fix-when-default-workspace-doesnt-exists.yaml
@@ -0,0 +1,3 @@
+bugfixes:
+  - terraform - fix ``current`` workspace never getting appended to the ``all`` key in the ``workspace_ctf`` object (https://github.com/ansible-collections/community.general/pull/5735).
+  - terraform - fix ``terraform init`` failure when there are multiple workspaces on the remote backend and when ``default`` workspace is missing by setting ``TF_WORKSPACE`` environmental variable to the value of ``workspace`` when used (https://github.com/ansible-collections/community.general/pull/5735).
diff --git a/plugins/modules/cloud/misc/terraform.py b/plugins/modules/cloud/misc/terraform.py
index 615c125cf3..2a018ea03c 100644
--- a/plugins/modules/cloud/misc/terraform.py
+++ b/plugins/modules/cloud/misc/terraform.py
@@ -48,7 +48,9 @@ options:
     version_added: 3.0.0
   workspace:
     description:
-      - The terraform workspace to work with.
+      - The terraform workspace to work with. This sets the C(TF_WORKSPACE) environmental variable
+        that is used to override workspace selection. For more information about workspaces
+        have a look at U(https://developer.hashicorp.com/terraform/language/state/workspaces).
     type: str
     default: default
   purge_workspace:
@@ -310,7 +312,7 @@ def _state_args(state_file):
     return []
 
 
-def init_plugins(bin_path, project_path, backend_config, backend_config_files, init_reconfigure, provider_upgrade, plugin_paths):
+def init_plugins(bin_path, project_path, backend_config, backend_config_files, init_reconfigure, provider_upgrade, plugin_paths, workspace):
     command = [bin_path, 'init', '-input=false', '-no-color']
     if backend_config:
         for key, val in backend_config.items():
@@ -328,7 +330,7 @@ def init_plugins(bin_path, project_path, backend_config, backend_config_files, i
     if plugin_paths:
         for plugin_path in plugin_paths:
             command.extend(['-plugin-dir', plugin_path])
-    rc, out, err = module.run_command(command, check_rc=True, cwd=project_path)
+    rc, out, err = module.run_command(command, check_rc=True, cwd=project_path, environ_update={"TF_WORKSPACE": workspace})
 
 
 def get_workspace_context(bin_path, project_path):
@@ -343,6 +345,7 @@ def get_workspace_context(bin_path, project_path):
             continue
         elif stripped_item.startswith('* '):
             workspace_ctx["current"] = stripped_item.replace('* ', '')
+            workspace_ctx["all"].append(stripped_item.replace('* ', ''))
         else:
             workspace_ctx["all"].append(stripped_item)
     return workspace_ctx
@@ -485,7 +488,7 @@ def main():
 
     if force_init:
         if overwrite_init or not os.path.isfile(os.path.join(project_path, ".terraform", "terraform.tfstate")):
-            init_plugins(command[0], project_path, backend_config, backend_config_files, init_reconfigure, provider_upgrade, plugin_paths)
+            init_plugins(command[0], project_path, backend_config, backend_config_files, init_reconfigure, provider_upgrade, plugin_paths, workspace)
 
     workspace_ctx = get_workspace_context(command[0], project_path)
     if workspace_ctx["current"] != workspace: