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In News
- India’s imports from China reached record high in 2022, and the trade deficit surged beyond $100 billion.
Key Points
- India’s import from China:
- India’s imports accounting for $118.5 billion, up from $97.5 billion
- Indian imports of Chinese goods were up by more than 21% last year.
- India’s export to China:
- India’s exports to China fell from $28.1 billion to $17.48 billion.
- The trade deficit reached $101.02 billion, up by 45%, from $69.4 billion in 2021.
- Overall trade:
- India’s bilateral trade with China reached a record $135.98 billion in 2022.
- It was up by 8.4% last year.
- China and other nations and Groupings:
- ASEAN: Trade with ASEAN, China’s biggest trading partner, increased 11.2% to $975.34 billion.
- EU: The EU ranked second among China’s trading partners, with trade up 2.4% to $847.32 billion
- The U.S.: Trade up 0.6% to $759.42 billion.
- Reason for Increasing imports:
- Recovery in demand in India,
- Increasing imports of intermediate goods, and
- Imports of new categories of goods such as medical supplies.
- In the past couple of years, India’s biggest imports from China included active pharmaceutical ingredients (APIs), chemicals, electrical and mechanical machinery, auto components, and medical supplies.
Trade Deficit
- About:
- A trade deficit occurs when a country’s imports exceed its exports during a given time period.
- It is also referred to as a negative balance of trade (BOT).
- Advantages of Trade Deficits:
- It allows a country to consume more than it produces. In the short run, trade deficits can help nations to avoid shortages of goods and other economic problems.
- It creates downward pressure on a country’s currency under a floating exchange rate regime. Domestic currency depreciation also makes the country’s exports less expensive and more competitive in foreign markets.
- Trade deficits can also occur because a country is a highly desirable destination for foreign investment.
- Disadvantages of Trade Deficits:
- It can facilitate a sort of economic colonization.
- If a country continually runs trade deficits, citizens of other countries acquire funds to buy up capital in that nation.
- That can mean making new investments that increase productivity and create jobs.
- However, it may also involve merely buying up existing businesses, natural resources, and other assets.
- If this buying continues, foreign investors will eventually own nearly everything in the country.
- Trade deficits are generally much more dangerous with fixed exchange rates.
- Under a fixed exchange rate regime, devaluation of the currency is impossible, trade deficits are more likely to continue, and unemployment may increase significantly.
- It can facilitate a sort of economic colonization.
Current Account Deficit (CAD)
- About:
- It is the shortfall between the money flowing in on exports, and the money flowing out on imports.
- It measures the gap between the money received into and sent out of the country on the trade of goods and services and also the transfer of money from domestically-owned factors of production abroad.
- Different from the Balance of Trade:
- It is slightly different from the Balance of Trade, which measures only the gap in earnings and expenditure on exports and imports of goods and services.
- Whereas, the current account also factors in the payments from domestic capital deployed overseas.
- For example, rental income from an Indian owning a house in the UK would be computed in the Current Account, but not in the Balance of Trade.
- Causes for CAD:
- Existing exchange rate, consumer spending level, capital inflow, inflation level, and prevailing interest rate.
- For the Current Account Deficit in India, crude oil and gold imports are the primary reasons behind high CAD.
- Implications:
- Current Account Deficit may be a positive or negative indicator for an economy depending upon why it is running a deficit.
- It may help a debtor nation in the short term, but it may worry in the long term as investors begin raising concerns over adequate return on their investments.
- Method to Deal:
- It could be reduced by boosting exports and curbing non-essential imports such as gold, mobiles, and electronics.
- Currency hedging and bringing easier rules for manufacturing entities to raise foreign funds could also help.
- The government and RBI could also look to review debt investment limits for FPIs, among other measures.
Conclusion
- India’s growing imports from China are both a worry, reflecting continued dependence for a range of key goods, and as a positive indicator of the Indian economy importing more intermediate goods.
What is a Current Account?
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Source: TH
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