The Prayas ePathshala

Exams आसान है !

Context:

The official trade statistics for October show that India’s trade imbalance reached a record level.

India’s figures for imports and exports:

While merchandise imports increased by 14%, merchandise exports increased by 6.29%.
In total, India imported almost $65 billion worth of commodities in October and exported $33.57 billion worth of goods.

What is a deficit in trade?

The excess of imports over exports in a nation that engages in international trade is known as a trade imbalance.
While there will always be a disparity between imports and exports in any developing country, including India, understanding the size of this gap and its underlying causes is essential to interpreting trade data.
Ideally, the trade imbalance shouldn’t grow too large, especially when considering the GDP (gross domestic product) as a whole.

Factors for the trade deficit to increase:

There are numerous causes that can cause a nation’s trade imbalance to increase. These elements fall under three general categories: structural, policy-related, and economic.

Financial Elements:

robust Domestic Demand: A robust economy with rising consumer spending may result in a rise in the import of goods and services, hence exacerbating the trade imbalance.
Exchange rate fluctuations can exacerbate the trade deficit by making imports more affordable and exports more expensive when the home currency declines in value relative to other currencies.
Savings and Investment Gap: When there is a strong demand for investments and a low rate of savings at home, there is a greater need to borrow money from overseas, which makes imports more expensive and increases the trade imbalance.

Factors of Structure:

Comparative advantage: A nation may import items at a cheaper cost than its trading partners if it specialises in producing a particular good more cheaply than those nations, creating a trade deficit.
Global supply chain disruptions have the potential to impede home production and raise dependency on imported commodities, which in turn can exacerbate a trade deficit.
Technology Lag: When particular industries do not improve technologically, domestic products become less competitive in global markets, increasing imports and widening the trade deficit.

Policies-Related Elements:

Trade barriers: By raising the cost of imports while lowering the export of items produced domestically, tariffs and other export-related restrictions can create a trade deficit.
Government subsidies and tax breaks for sectors involved in imports have the potential to increase the appeal of imports relative to domestically produced goods, hence exacerbating the trade deficit.
Investment Policies: Companies may relocate manufacturing abroad as a result of policies that promote foreign investment over domestic production, which raises imports and widens the trade deficit.

India’s export-related performance:

Considering the nation’s dismal recent record in this area, the October increase in exports should be viewed as a positive trend.
For example, in the current fiscal year, which began in April, October is only the second month that merchandise exports have increased.
Taken as a whole, October is only the third month in which exports have increased.
Exports of pharmaceuticals and drugs led the group in terms of growth rate, increasing by more than 29% to $2.42 billion in October.
Agriculture, engineering, and electronic goods all performed well. However, the picture takes on some variation beyond the increase rate in comparison to October 2022.
The truth is that $35.7 billion was the value of India’s exports in October 2021.
This recent surge is placed into perspective by the fact that India’s exports in October were approximately 6% lower than they were two years ago.

Import performance:

The story is a little different in terms of import.
Although India’s import growth has also been negative in recent months, overall import growth has increased from October 2021 ($53.6 billion) to October 2022 ($57.9 billion) to the current $65 billion.

The external trade trend as a whole:

The growth rates of imports and exports had both been negative or very low, but in October there was a significant divergence between the two trend lines.
Consequently, the trade deficit of India reached a record high of $31.5 billion in October on a monthly basis.
The nearly twofold increase in gold imports from $3.7 billion to $7.2 billion in October is a major contributing factor.

Way Forward:

The rupee weakens due to the trade deficit. Because more rupees will be required in the future to buy the same amount of imports, this devaluation makes the trade deficit worse. Consequently, managing trade deficits and preserving economic stability need careful attention to detail and the implementation of suitable policies.