India’s Trade Deficit

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.