Story Of The Week

MOMENT OF EXULTATION: TRADE DEFICIT AT A RECORD LOW

Trade Deficit is an economic measure of a negative balance of trade in which a country’s imports exceeds its exports. It thus represents an outflow of domestic currency to foreign markets. India recorded a USD 5.07 billion trade deficit in March of 2016, compared to a USD 11.39 billion gap a year earlier. It is the lowest deficit since March of 2011. This is also clearly depicted in the comparative figures given in the graph below:

trade deficit 1

Figure 1: Trade deficit of India (in USD billion)

Exports fell 5.47 percent year-on-year to USD 22.7 billion, the 16th straight month of decline since December 2014 as non-petroleum exports decreased 3.49 percent. Imports dropped 21.56 percent year-on-year to USD 27.78 billion. Oil purchases slumped 35.3 percent and non-oil imports shrank 17.98 percent. In the 2015-16, trade deficit narrowed to USD 118.5 billion from USD 137.7 billion in the previous period, as exports decreased 15.8 percent and imports fell 15.28 percent. Balance of Trade in India averaged -2105.38 USD Million from 1957 until 2016, reaching an all-time high of 258.90 USD Million in March of 1977 and a record low of -20210.90 USD Million in October of 2012. Refer the graph given below for balance of trade of India which has improved since January 2016.

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Figure 2: Balance of Trade of India(in USD Million)

Impact on Economy:

The positive shift in terms of trade has helped India safeguard from the slowdown in the global economy. Positive impact is not restricted to this as it will also enable India in outperforming other major economies including China and outpacing their economic growth. Though there has been fall in exports of India but that is in tandem with the global trend of plummeting exports. The growth in exports have fallen for the US (10.81 per cent), European Union (7.40 per cent), China (11.37 per cent) and Japan (12.85 per cent) for January 2016 over the corresponding period previous year as per WTO statistics.

Impact on Currency:

If trade deficit is large and unsustainable then the currency is expected to weaken as the economy adjusts to create the surpluses needed to repay foreign investors. But the given decline in trade deficit is expected to stabilize the depreciating Indian rupee against dollar. The rupee climbed the most in a month after India’s trade deficit narrowed to a five-year low. Moreover, US data strengthened the case for Federal Reserve to go slow in raising interest rates, which is another positive sign for Indian currency.

Impact on Employment:

It can be expected that declining trade deficit will help further improve the situation of employment in the country as there will be economic growth and stability.  More job opportunities can be anticipated with the development of the Indian economy and the initiatives by the Modi government.

The Road Ahead:

Decrease in exports is a cause of concern for the government. Sluggish global demand, declining imports from China and devaluation of the Chinese currency have deterred India’s exports from growing despite the commerce department expanding export incentive schemes for various products and markets. But better times can be expected ahead as government is taking initiative to boost the inflow of foreign capital and promote exports. According to the professional forecasters’ projection released by the Reserve Bank of India earlier this month, India’s merchandise exports and imports are expected to grow 1.7% and 4.4%, respectively, in 2016-17. Economic stability, FDI liberalization & improvement in consumer sentiment will help global brands witness a very conducive environment for investment. Reduction in import bill would help manage the trade deficit in future as well. Indian economy is thus estimated to grow at 7.6 percent in the current fiscal year.

References:

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2 replies »

  1. as per my understanding, this feat
    is not because of any extra ordinary performance of indiam economy but because of the world economy.
    crude prices are the major contributors for decrease in imports.
    Major concern is exports. India is lucky that crude oil prices compensated the decreased exports.
    If exports have shrinked, how would it help in boosting employment?

    • Crude oil prices have had a significant impact on all economies around the world but for India it has helped to drive down the value of imports. Thus, falling price has brought positive impact on the economy. Moreover, though falling exports are a cause of perturbation but even that is in tandem with the global exports trend. It is the decline in trade deficit which will stabilize economy in long run creating employment opportunities.