GS Paper II
News Excerpt:
India has recorded a trade deficit, the difference between imports and exports, with nine of its top 10 trading partners, including China, Russia, Singapore, and Korea, in 2023-24, according to official data.
Key highlights from Data
- India’s trade deficit data showed that the deficit with China, Russia, Korea, and Hong Kong increased in the last fiscal compared to 2022-23,
- The trade gap with the UAE, Saudi Arabia, Russia, Indonesia, and Iraq narrowed.
- China emerged as India's largest trading partner with two-way commerce in 2023-24, edging past the US.
- India has a free trade agreement with four of its top trading partners - Singapore, UAE, Korea, and Indonesia.
- India's total trade deficit in 2023-24 narrowed to $238.3 billion compared to $264.9 billion in the previous fiscal.
Bilateral Trade with the US:
- The bilateral trade between India and the US stood at $118.28 billion in 2023-24.
- Washington was the top trading partner of New Delhi during 2021-22 and 2022-23.
- India has a trade surplus of $36.74 billion with the US in 2023-24.
- America is one of the few countries with which India has a trade surplus.
- The surplus is also there with the UK, Belgium, Italy, France and Bangladesh.
Expert Opinion on Trade Deficit.
- According to trade experts, a trade deficit is not always bad if a country is importing raw materials or intermediary products to boost manufacturing and exports, but it puts pressure on the domestic currency.
- Economic think tank Global Trade Research Initiative (GTRI) said that a bilateral trade deficit with a country is not a major issue unless it makes a country overly reliant on that country's critical supplies. However, a rising overall trade deficit is harmful to the economy.
Impact of Rising Trade Deficit
- A rising trade deficit, even from importing raw materials and intermediates, can cause the country's currency to depreciate because more foreign currency is needed for imports.
- This depreciation makes imports more expensive, worsening the deficit.
- The growing deficit may increase external debt and deplete foreign exchange reserves and signal economic instability to investors, leading to reduced foreign investment.
Strategies to Cut Trade Deficit:
- Cutting the trade deficit requires boosting exports, reducing unnecessary imports, developing domestic industries, and managing currency and debt levels effectively.
Measures to reduce Trade Deficit:
- Promote exports: Governments can implement policies to make their exports more competitive in global markets. This can include measures such as providing tax incentives, subsidies, or trade assistance programs for export-oriented industries, negotiating favorable trade agreements, and promoting the nation's products through marketing and branding efforts.
- For Example: The Trump administration imposed tariffs on imported steel and aluminum in 2018, as well as on billions of dollars' worth of Chinese goods, in an effort to reduce the U.S. trade deficit.
- Impose import restrictions: Countries can impose tariffs, quotas, or other trade barriers to make imported goods more expensive or less accessible, thereby reducing import demand. However, these measures can also invite retaliation from trading partners and potentially harm domestic consumers and industries that rely on imported inputs.
- Encourage domestic production: Governments can provide incentives, such as tax breaks or subsidies, to domestic industries that compete with imported goods. This can help boost domestic manufacturing and reduce reliance on imports.
- For Example: In 2020, the Indian government announced a production-linked incentive (PLI) scheme to encourage domestic manufacturing in key sectors such as electronics, pharmaceuticals, and automotive components. The scheme offers financial incentives to companies that invest in local production facilities, with the aim of reducing India's reliance on imports.
- Promote import substitution: Countries can actively encourage the development of domestic industries that can produce goods currently being imported, thereby reducing the need for those imports.
- Depreciating currency value: Currency devaluation is a deliberate downward adjustment of the value of a country's currency against another currency. Reducing the value of the Indian rupee would make Indian exports more competitive, increasing demand for Indian products. However, this would make imports more expensive and this measure has several other unpleasant side effects such as inflation and this measure is dependent on the elasticity of demand and hence is not an easy solution for decreasing trade deficit.
Government Initiative to Increase export:
- Export Promotion: The policy focuses on promoting exports through various measures such as incentivizing exporters, collaborating with states and districts, facilitating e-commerce exports, and streamlining export promotion schemes like Advance Authorization and EPCG.
- Ease of Doing Business: The policy aims to reduce transaction costs and facilitate exports through process re-engineering, automation, and online systems, making it easier for exporters, especially MSMEs, to access export benefits.
- Developing Export Hubs: The policy encourages the development of new export hubs by recognizing "Towns of Export Excellence" and promoting exports at the district level through District Export Promotion Committees.
- Promoting High-End Exports: The policy focuses on promoting exports of dual-use high-end technology items under the SCOMET (Special Chemicals, Organisms, Materials, Equipment and Technologies) regime, which could potentially increase the value of exports.
- Facilitating Merchanting Trade: The introduction of provisions for merchanting trade could help develop India as a trading hub, potentially increasing the flow of trade and related services.
