Economy

Does trade deficit signal trouble for India’s economy?

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Since 1990, on an average, India has had an overall trade deficit. Even so, for the period April–September 2020, India witnessed a trade surplus and is likely to post a current account surplus of 2% of GDP for 2020-21. However, this might not be a reason to rejoice. Mint explains:

How is trade balance linked to economy?

Trade balance is a part of the current account component of a country’s balance of payments (BOP). It is the net value of a country’s exports and imports over a certain time period. Trade balance is not inclusive of financial transfers, investment flows. Trade surplus is when the value of a country’s exports component is higher than the import component. Trade deficit is the opposite, that is when the country’s imports are higher than its exports. The notion that trade deficits are necessarily bad is a misconception and has been refuted by economists and trade experts.

What has been the trend in trade balance?

Predominantly, India has been experiencing a trade deficit, which gets covered through a positive capital account. India’s trade in services generally has a surplus and the deficit is mostly in trade of tangible goods. But, for the first time in 13 years, India is expected to have a current account surplus of 2% of GDP in FY21. This was on account of lower trade deficit, which has since April 2020 been in surplus, due to declining crude prices and a sharp decline in local and global demand. During April-Sept 2020, India saw a trade surplus. October 2020 onwards India has again begun experiencing a trade deficit.

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Should increasing imports be checked?

No. Certain imports like crude oil, raw materials, intermediaries and technology are a must for keeping the economy moving. Rather, a fall in imports is a matter of concern as it was seen during the first half of the pandemic. With mineral fuels, constituting 32% of total imports and industrial imports widening the trade deficit, an emerging economy like India should not be worried. Rather, a drop in imports of machinery and equipment—capital goods which signify industrial activity—will not augur well for the economy.

What are the export-boosting factors?

Countries such as the US (15% of total India’s exports), UAE (11%), Hong Kong (5%), China (4%), Singapore (4%) and UK (3%) are India’s main export destinations. Factors that can boost India’s exports include improved demand conditions in the key countries that India exports to; a weaker domestic currency; Centre-led tax sops to export-oriented sectors, interest subvention schemes; free trade deals; increasing the pool of skilled labour, among others.

Jagadish Shettigar and Pooja Misra are faculty members at BIMTECH

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