Syllabus: GS3/Economy
Context
- India’s merchandise trade deficit came in at a three-month low of $21.94 billion in December 2024.
About
- India’s merchandise exports contracted 1% year-on-year even as imports rose 4.9% in December 2024.
- Earlier, the country’s merchandise trade deficit had widened to a record-high of $37.84 billion in November.
India’s Total Trade Deficit
- India’s trade deficit has shown considerable improvement in FY 2023-24 (April-March).
- Overall trade deficit for FY 2023-24 (April-March)* is estimated at USD 78.12 Billion as compared to the deficit of USD 121.62 Billion during FY 2022-23 (April-March), registering a decline of (-) 35.77 percent.
- The merchandise trade deficit during FY 2023-24 (April-March) is USD 240.17 Billion compared to USD 264.90 Billion during FY 2022-23 (April-March), registering a decline of (-) 9.33 percent.
Difference Between Trade Deficit and Merchandise Trade Deficit:
| Aspect | Trade Deficit | Merchandise Trade Deficit |
|---|---|---|
| Definition | A situation where a country’s total imports exceed its total exports, including goods and services. | A specific type of trade deficit that only concerns the balance of imports and exports of physical goods (merchandise). |
| Broader Scope | Broader, as it encompasses both goods and services. | Narrower, focused exclusively on goods (merchandise). |
| Policy Focus | Often requires comprehensive economic policy adjustments, including trade agreements, currency values, or fiscal policies. | Primarily focused on policies that affect physical trade of goods, such as tariffs or trade barriers. |
Reasons for Trade Deficit
- High Import of Crude Oil: India is a major importer of crude oil, which significantly contributes to its trade deficit due to rising global oil prices.
- Gold Imports: India has a strong demand for gold, particularly for jewelry, leading to high import bills.
- Global Economic Conditions: Economic growth or downturns in key trading partners (such as the US, China, and the EU) affect demand for Indian exports, thereby influencing the trade balance.
- High Import Demand: Rising domestic demand for goods like crude oil, gold, electronics, and machinery increases imports, widening the trade deficit.
- Limited Export Competitiveness: Despite growth in service exports, India’s merchandise exports have not grown at the same pace, leading to an imbalance between imports and exports.
- Structural Imbalances in Manufacturing: India’s manufacturing sector still faces challenges in scaling up and competing globally, leading to reliance on imports for industrial inputs and finished goods.
- Rupee Depreciation: A weaker Indian rupee increases the cost of imports, exacerbating the trade deficit.
Challenges
- Pressure on Foreign Exchange Reserves: A persistent trade deficit depletes foreign exchange reserves, affecting the country’s ability to meet its external financial obligations.
- Currency Depreciation: A high trade deficit weakens the Indian Rupee, increasing the cost of imports and triggering inflation.
- Widening Fiscal Deficit: The need to finance the trade deficit requires increased borrowing, putting pressure on government finances.
- Impact on Economic Growth: If the deficit continues for an extended period, it strains economic stability, affecting long-term growth prospects and domestic industries.
Measures to Improve Trade Deficit
- Boosting Exports: India has focused on increasing exports through incentives, trade agreements, and enhancing the competitiveness of sectors like textiles, pharmaceuticals, and IT.
- Promoting “Make in India” Initiative: Encouraging domestic manufacturing and reducing dependency on imports by fostering local production in key sectors such as electronics and machinery.
- Attracting Foreign Investment: Encouraging foreign direct investment (FDI) to support domestic industries, reduce import dependence, and promote technology transfer.
- Diversifying Trade Partners: Expanding trade ties with new markets, particularly in Africa, Latin America, and Southeast Asia, to reduce over-reliance on a few regions.
- Improving Infrastructure: Enhancing port facilities, logistics, and transport infrastructure to reduce costs and improve export efficiency.
Way Ahead
- Strengthening export competitiveness.
- Enhancing domestic manufacturing.
- Reducing dependence on crude oil imports by promoting renewable energy sources and improving energy efficiency.
- Expanding trade relationships with countries beyond traditional partners to reduce vulnerability to global economic fluctuations.
Source: TH
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