India's Merchandise Trade Deficit

Syllabus: GS3/Economy

Context

India’s merchandise trade deficit came in at a three-month low of $21.94 billion in December 2024.

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 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.

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.

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.

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.

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.

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

Previous article India-Bangladesh Border Disputes

Next article Nine Years of Startup India