Trade Imbalance: On India’s Merchandise Exports

Syllabus: GS3/ Economy

In Context

• India’s merchandise exports witnessed a slight improvement in April 2024, showing a modest increase of 1.07% compared to the same month the previous year.

Key Analysis

• Export Trends:
  • In 2023-24, India’s merchandise exports declined by over 3% due to geopolitical and logistical disruptions.
  • However, in April 2024, there was a marginal uptick of 1.07% (worth $370 million) compared to the previous year.
  • Key contributors to export growth last month were pharma, chemicals, electronics, and petroleum products (recovering from a 35% contraction in March).
• Trade Deficit and Import Bill:
  • Despite export growth, India’s goods import bill surged by 10.25% to over $54 billion in April.
  • Consequently, the trade deficit reached $19.1 billion, the highest in four months.
  • Rising oil and gold prices played a role in increasing the import bill.
• Global Trade Outlook:
  • Global trade volumes are expected to rise by 2.6% in 2024 after a 1.2% decline in 2023 (according to the World Trade Organization).
  • India aims to capitalize on this trend by targeting key markets in the western world with lower inflation and improved growth rates.
• Challenges and Opportunities:
  • India needs to address challenges in labour-intensive sectors like garments and footwear, where it faces competition from countries like Bangladesh and Vietnam.
  • Quality concerns (e.g., spices, drugs) and environmental issues (related to shrimp exports) need attention.
  • Reviving agricultural exports, considering healthy monsoon prospects, is crucial.

Negative Impact of trade imbalance on the Indian economy

• Currency Depreciation: A trade deficit often leads to a weakening of the Indian rupee against other currencies. This makes imports more expensive and can fuel inflation.
• Increased External Debt: To finance the deficit, India might need to borrow from foreign sources, leading to an increase in external debt and interest payments.
• Reduced Domestic Production: A reliance on imports can discourage domestic production, leading to job losses and a slowdown in economic growth.
• Balance of Payments (BoP) Issues: A persistent trade deficit can strain the BoP, making it difficult to manage foreign exchange reserves and meet international financial obligations.

Measures Needed to keep the trade imbalance in acceptable limits

• Export Diversification: Expanding the range of exported products and services to reduce dependence on a few key sectors. This can be achieved by promoting sectors like agriculture, pharmaceuticals, engineering goods, and services like IT and tourism.
• Market Access: Negotiating and securing favorable trade agreements with other countries to reduce barriers to Indian exports. This includes addressing non-tariff barriers like technical standards and regulations.
• Export Infrastructure: Investing in infrastructure like ports, airports, and logistics to facilitate efficient movement of goods. This will reduce transaction costs and make Indian exports more competitive.
• Export Promotion: Providing financial and technical assistance to exporters, particularly small and medium enterprises (SMEs). This can include export credit, insurance, and marketing support.
• Skill Development: Enhancing the skills of the workforce to meet the demands of global markets. This includes training programs in areas like manufacturing, design, and technology.
• Import Substitution: Encouraging domestic production of goods that are currently imported. This can be achieved through incentives like tax breaks, subsidies, and easier access to credit for domestic manufacturers.
• Tariff and Non-Tariff Measures: Judicious use of tariffs and non-tariff measures to protect domestic industries from unfair competition. However, this should be done carefully to avoid escalating trade tensions.

Way Forward

• Lowering Trade Tariffs and Simplifying Procedures: NITI Aayog CEO BVR Subrahmanyam emphasized the need to reduce trade tariffs and simplify procedures.
  • Lower tariffs and streamlined processes encourage trade and attract global value chains.
• Focus on Domestic Industries: India aims to reduce reliance on imports by developing its domestic industries.
  • Incentives can be provided to local companies to manufacture goods currently imported, creating employment opportunities.
• Shift in Trade Policy: India shifted focus from the Regional Comprehensive Economic Partnership (RCEP) to Western and West Asian free trade agreements.
  • The goal is to avoid further trade imbalances and attract global value chains.
• Enhancing Services Sector: India’s advantage lies in the services sector due to its skilled manpower and education system.
  • Removing stringent regulations and promoting services exports can contribute to balanced trade