Why in the news?
According to official data from Union Ministry of Commerce and Industry, in the FY 2023-24, India recorded trade deficit with 9 out of its top 10 trading partners.
Current Status of India's External trade (FY 2023-24)
- Trade deficit (also known as negative trade balance) occurs when country's value of imports are more than that of exports.
- China, USA, UAE, Russia, and Saudi Arabia are India's largest trading partners. (in descending order)
- India's trade deficit with China, Russia, South Korea, and Hong Kong increased as compared to 2022-23, while it narrowed with UAE, Saudi Arabia, Indonesia, and Iraq.
- USA, Netherlands, UK, Belgium, and Italy are top 5 trading partners with which India has trade surplus.
Impact of higher trade deficit on Economy
- Negative
- Depletion of Forex reserves due to the need to pay for excess imports, raising concerns of depreciation of domestic currency.
- Widening current account deficit which may adversely affect credit rating of the country and raise borrowing costs.
- Strategic implications due to sustained trade deficit, particularly for essential products or critical sectors.
- Positive
- Access to wider range of goods, increased domestic investment if deficit is driven by imports of capital goods, etc.
Reasons behind India's higher trade deficit
- Reliance on imported inputs, including crude oil and pharmaceutical ingredients.
- Changing consumption patterns, including increased demand for consumer durables, luxury goods etc.
- Structural factors such as sub-optimal growth of manufacturing sector, higher logistics cost, infrastructure bottlenecks etc.
- Domestic policies such as inverted duty structure, frequent bans on exports of commodities etc.
- Others – Sub-optimal utilization of FTAs, imposition of non-tariff barriers by developed countries etc.