Trade Deficit of India

General Studies Paper-3

Context: India has recorded a trade deficit, the difference between imports and exports, with nine of its top 10 trading partners, including China, Russia, Singapore, and Korea, in 2023-24

Key Highlights

• The data showed that the deficit with China, Russia, Korea, and Hong Kong increased in the last fiscal compared to 2022-23, while the trade gap with the UAE, Saudi Arabia, Russia, Indonesia, and Iraq narrowed.
• China has emerged as India’s largest trading partner with $118.4 billion of two-way commerce in 2023-24, edging past the U.S.
• India’s total trade deficit in the last fiscal narrowed to $238.3 billion as against $264.9 billion in the previous fiscal.

What is the trade deficit ?

• A trade deficit occurs when a country imports more than it exports. In other words, when a country buys more than it sells, it has a trade deficit.

Causes

• There are multiple factors that can be responsible.
• One of them is some goods not being produced domestically.
• In that case, they have to be imported.
• This leads to an imbalance in their trade.
• A weak currency can also be a cause as it makes trade expensive.

Impacts

• A bilateral trade deficit with a country isn’t a major issue unless it makes us overly reliant on that country’s critical supplies.
  • However, a rising overall trade deficit is harmful to the economy.
• A rising trade deficit, even from importing raw materials and intermediates, can cause the country’s currency to depreciate because more foreign currency is needed for imports.
  • This depreciation makes imports more expensive, worsening the deficit
• More imports than exports, according to economists, impact the jobs market and lead to an increase in unemployment
• To cover the growing deficit, the country might need to borrow more from foreign lenders, increasing external debt and this can deplete foreign exchange reserves and signal economic instability to investors, leading to reduced foreign investment.

Steps of India for reducing trade deficit

• Government has taken several steps to reduce import reliance so as to curb the trade deficit.
  • These include creating/enhancing of domestic capacity,
    • Incentivizing domestic manufacturing through Production Linked Incentive (PLI) schemes,
    • Phased manufacturing plans,
    • Timely use of trade remedy options,
    • Adoption of mandatory technical standards,
    • Enforcement of FTA Rules of Origin (roo) and
    • Development of import monitoring system
• Government launched the Foreign Trade Policy 2023 which aims at process re-engineering and automation to facilitate ease of doing business for exporters

Suggestions

• A deficit is not always bad, if a country is importing raw materials or intermediary products to boost manufacturing and exports.
• However, it puts pressure on the domestic currency.
• Cutting the trade deficit requires boosting exports, reducing unnecessary imports, developing domestic industries, and managing currency and debt levels effectively.