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Trade Deficit – Indian Economy Notes

A trade deficit occurs when a country's imports exceed its exports, indicating a negative balance of trade. In India, the trade deficit has reached record levels, with significant increases in both exports and imports over recent years. While a small trade deficit can stimulate economic growth, a persistent deficit may lead to overdependence on imports and economic vulnerabilities.

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Trade Deficit – Indian Economy Notes

A trade deficit occurs when a country's imports exceed its exports, indicating a negative balance of trade. In India, the trade deficit has reached record levels, with significant increases in both exports and imports over recent years. While a small trade deficit can stimulate economic growth, a persistent deficit may lead to overdependence on imports and economic vulnerabilities.

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Trade Deficit – Indian Economy Notes


Download PDF Previous Year Papers

Sunil Kumar D Nov 4, 2023

A Trade deficit occurs when the cost of a country's imports exceeds the cost of its exports. It's also known as a
negative balance of trade, and it's one way of measuring international commerce.

India's Trade Deficit goes up record level at $100 billion | What will impact on …

A trade deficit is calculated by subtracting the total value of a country's exports from its total value of imports.
In this article, we will study Trade Deficit, which is important for UPSC Examination.

To Read update on this topic:


1. Why are India’s slowing exports a cause for concern?

Table of Contents

1. Trade Deficit
Sample Papers Download PDF
2. Causes of Trade deficit
3. Impact of Trade Deficit
4. Trade Deficit in India
5. Advantages of Trade Deficit
6. Disadvantages of Trade Deficit
7. Conclusion
8. FAQs
9. MCQs

What is Trade Deficit


When a country's imports surpass its exports in a fiscal year, it is considered to be a trade deficit. The
negative balance of trade is another phrase for the trade deficit.
The term "trade deficit" refers to the amount of international trade that takes place between countries
throughout the world.
Different types and categories of products and services, as well as foreign transactions such as current
account, financial account, and capital account, can all be used to compute trade deficits.
When an international transaction account has a negative balance, it is said to be a trade deficit. These
foreign accounts, such as the balance of payments, track all monetary transactions between residents and
non-residents.

Other Relevant Links

Capital Account Convertibility Currency Manipulation

Indian Foreign Exchange Market Tarapore Committee

Causes of Trade deficit


The following are the reasons behind the trade deficit:

A trade deficit occurs when a country cannot produce what it requires and must import things from other
countries while paying import taxes. The current action deficit is the term for this situation.
It can also happen when businesses are involved in the production of goods in another country. The raw
resources used in manufacturing are exported, whilst the final commodities brought into the country are
imported.

Impact of Trade Deficit


The following are the impacts of the trade deficit:

It raises the standard of living at first because residents have access to a wider range of things.
If the trade imbalance remains, the government will have to obtain additional foreign exchange to close the
gap, causing the local currency to fall.
To close the import-export imbalance, a larger trade deficit necessitates the recruitment of foreign investors.
Because more imports mean fewer job prospects, a bigger trade imbalance causes jobs to be outsourced to
other countries.
Demand for imported items leads to a decrease in demand for locally produced goods, resulting in factory
closures and job losses.

Trade Deficit in India - A brief


According to preliminary government data, India's trade deficit in goods increased from USD 9.98 billion in
March 2020 to USD 14.11 billion in March 2021.
Merchandise Exports:
India's merchandise exports were USD 34.0 billion in March 2021, up from USD 21.49 billion in March
2020, a 58.23 percent increase.
Indian exports surpassed USD 34 billion in March 2021 for the first time in a month.
Merchandise Imports:
India's merchandise imports totaled USD 48.12 billion in March 2020, an increase of 52.89 percent from
USD 31.47 billion in March 2019.
Thus, with a trade deficit of USD 14.11 billion in March 2021, India is a net importer.
The same is highlighted in the chart below.

Trade Deficit: FY 2020-2021

Advantages of Trade Deficit


The following are some of the advantages of having a trade deficit:

It enables a country to consume more than it can produce.


It assists countries in avoiding any shortages of supplies.
When countries are participating in trade, it gives them a competitive advantage. It is good to boost global
wealth as a whole.
It makes it possible to attract more foreign direct investment.

Disadvantages of Trade Deficit


The following are the disadvantages of a trade deficit:

More imports contribute to deflation and an increase in the fiscal imbalance, which is damaging to a
developing country.
When demand for foreign goods rises, more jobs are outsourced while home industries decline with less
demand.
Due to the trade deficit, the country may wind up handing over ownership of its resources and assets to the
foreign country.
A higher trade deficit causes the value of the local currency to fall.
Conclusion
A small trade deficit is necessary for the development of the country as it increases demand, consumption and in
turn, causes economic growth. However, an unchecked trade deficit can lead to overdependence of the economy
on imports, and any small disturbances in the geopolitical scenario and supply chain will create a ripple effect and
causes widespread inflation which is unsustainable.

Other Relevant Links

Indian Economy Notes Indian Forex Reserves

Open Economy and Closed Economy Trade Issues of India

Indian Economy and issues relating to planning Indian Economy in Pre-independence Period

FAQs
Question: What is called a trade deficit? ➕
Question: Is India a trade deficit? ➕
Question: How do you calculate trade balance? ➕
MCQs
Question: Among the following which one is the largest exporter of rice in the world in the last five years?

(a) China

(b) India

(c) Myanmar

(d) Vietnam

Answer: (b) See the Explanation ➕


Question: Consider the following actions that the government can take:

1. Devaluing the domestic currency.


2. Reduction in the export subsidy.
3. Adopting suitable policies which attract greater FDI and more funds from FIIs.

Which of the above action/actions can help in reducing the current account deficit?

(a) 1 and 2

(b) 2 and 3

(c) 3 only

(d) 1 and 3
➕

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