India is a very active country when it comes to trade like exports and imports. However, it has been more than a year since the pandemic hit India and the dynamics have changed on every front. What is the position of India’s Trade Balance now-is it in deficit or in surplus? This article will guide the readers through it.
Now, first and foremost, it is best to start with the basics. For that, let us first understand, What is Trade Balance? In the most simple words, the Trade balance is the difference between the value of a country’s exports and the value of the country’s imports for a given time period. The trade balance is also referred to as the balance of trade, the international trade balance, commercial balance, or net exports. The trade balance is a very good indicator of a country’s economy. A positive balance occurs when exports are greater than imports and is referred to as a trade surplus. A negative trade balance occurs when exports are less than imports and is referred to as a trade deficit.
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What Is Trade Balance?
Trade Balance = Country’s Exports – Country’s Imports
Example: If India imported $1 billion in 2016, but exported $0.8 billion to other countries, then India had a trade balance of -$0.2 billion, or a $0.2 billion trade deficit.
India is in a Trade deficit position. India’s Trade Balance recorded a deficit of 13.9 USD billion in August 2021, compared with a deficit of 11.0 USD billion in the previous month, that is July, 2021.
- In August 2021, India’s trade deficit was brought lower to USD 13.81 billion from a preliminary estimate of USD 13.87 billion. But in 2020, this trade gap was USD 8.2 billion, which means now it has almost doubled.
- India’s Imports spiked to 51.72 percent, every year to USD 47.09 billion. This can be mainly due to purchases of crude oil (81 percent).
- On the other hand, India’s Exports rose at a relatively gradual pace of 45.76 percent to USD 33.28 billion. This was mainly driven by exports of petroleum products (144.6 percent), gems and jewelry (88.3 percent), engineering goods (59.01 percent), and cotton and handloom products (55.84 percent). While exports for these items bloomed, it was not the same for some other items. For example, exports fell significantly for Iron ore, it was -64.58 percent and for oil meals, it was -45.75 percent.
India’s Trade Balance: Explained
- THE UNITED STATES OF AMERICA: India has a very cordial relation with USA and their trading relations are equally good. The USA is a developed nation and India is a developing country. So, having a smooth trade relation between these countries have very good future prospects for growth and development in India. Till July 2021, India’s Exports with US hold value of 22,014.2. However, the imports are of 39,680.1. So, India is in a trade deficit of -17,665.9. (These values are in millions of US dollar on a nominal basis).
- THE UAE: India has strong trade relations with the UAE since many centuries. For the year 2019-20, UAE was the third largest export destination for India. India has grown as an economy owing to the strong trade links between India and the middle east countries. The foreign direct investments and portfolio investments have led to improved job creations in India. For the year 2021, till the month of July, 2021, India’s exports to the UAE was at 1036.87 INR billion. For the same year, till July 2021, India’s imports from UAE was 1677.81 INR billion. So, the Trade Balance of India with UAE is -640.94 INR billion, that is, India is in a trade deficit with UAE.
- THE EUROPEAN UNION: The countries in Europe are very open and warm towards having trade with India. Europe is a free trade market, and India has been a partner since 2007. The European Union is a transparent, robust, and non-discriminatory business environment for sellers from India, and Indian sellers have the opportunity of flourishing in the competition. For this year (2021), till July, 2021, India’s exports to EU amounts to 3313.67 INR billion. The same data for Imports till July, 2021 is 4027.93 INR billion. So, India has a trade deficit of 714.26 INR billion with the EU.
- CHINA: After the pandemic hit India, India’s trade relations with China got somewhat shaken. However, China is a strong trading partner of India’s. Trade deficit with China is shrinking now. In 2020-21, India’s exports to China has increased to USD 21.19 billion in 2020-21, from USD 16.61 billion in the financial year 2019-20. However, when it comes to imports’ data, for the year 2020-21, it is USD 65.21 billion. Imports’ value for the year 2019-20 was USD 65.26 billion. So, for the year 2020-21, India is in a trade deficit of USD 44.02 billion with China.
- SINGAPORE: Singapore is another important trade partner of India. For the year 2021, till July, India’s exports to Singapore amounted to 506.3 INR billion. Likewise, India’s imports from Singapore for the same time period, amounts to 744.82 INR billion. So, here, the balance of trade sums up to -238.52 INR billion. Hence, India is in a trade deficit with Singapore.
- JAPAN: India has very good trade relations with Japan. For the year 2021, till July, India’s exports to Japan amounted to 214.01 INR billion. Likewise, imports from Japan amounted to 624.45 INR billion. So, as a result India is in a trade deficit of 410.44 INR billion.
- AUSTRALIA: India has been in a trade relation with Australia since long. However, India is in a deficit. For the year 2021, India’s exports to Australia amounted to 234.75 INR billion. On the other hand, for the same time period, India’s imports from Australia amounts to 513.98 INR billion. So. the trade balance is of -279.23 INR billion.
- INDONESIA: Among the ten members of the Association of Southeast Asian Nations, Indonesia is India’s second largest trading partner after Singapore. For the year 2021, India’s exports to Indonesia amounted to 301.63 INR billion till the month of July. For the same time period, that is, July, 2021, India’s imports from Indonesia amounted to 555.83 INR billion. So, India is in a trade deficit of 254.2 INR billion with Indonesia.
So, overall, according to the data of the Trade Balance of India with the above countries, it is safe to establish that India is in a trade deficit situation. Having a Trade deficit has its own pros and cons. It is not very dangerous unless the situation of the Trade deficit in a country has been since time immemorial. The negative effects of trade deficits tend to correct themselves over time. Milton Friedman argued that trade deficits, in the long run, are not always harmful as currency can come back to the country in the form of foreign investment rather than demand for exported products in foreign markets.
Impact of Trade Balance on Indian Economy
- Falling Value of Indian Rupee: The major affect of Trade Deficit on the economy is the falling value of currency. The value of a country’s currency depends on many factors and it is very closely linked to imports and exports, that is, trade of the country. So, if the trade deficit situation of India does not improve, there is further risk of rupee depreciation in future. Globally, there will be lower demand for Indian currency. However, if there is an increased demand for Indian products in export markets, the value of the rupee should increase as demand for Indian products increases.
- Rise in Unemployment: Although Unemployment and Trade deficit are not rigidly related, the phenomenon still play a role in unemployment levels. If there is trade deficit, job opportunities would be lessened. When more and more products are demanded from abroad, and local products are not relatively demanded in abundance, the job opportunities will shift abroad. Unemployment levels in India are not very good. So, if trade deficit situation in India is not helped, the unemployment will further rise.
- Deflation: When level of imports are more than level of exports, that is, there is Trade deficit, a country basically sends its currency abroad, leading to less liquidity in their own nation. The domestic money supply shrinks. So, there will be deflation. However, this will depend upon the severity of deflation. In India, the trade deficit is not very severe. So, deflation can be easily prevented if the trade deficit in India comes under control.
Can India’s Trade Balance Be Improved?
- Increasing Savings by less Consumption: If government encourage less consumption and less wastage of products, especially in private sector, savings of products will be done. This will lead to a decrease in imports, as people will reduce their demands and consume from the saved products.
- Competitive Exports: Indian products should be of high quality to attract the buyers. Secondly, exports should also be cheaper, in order to make the exports attractive. If the exports are cheaper, the demand for Indian products will increase and this will lead to more exports.
- Relevant Trade Policies: Some policies can be framed that focuses on improving competitiveness of the Indian economy globally and suggests ways to increase productivity, making Indian exports more attractive in the market. This solution will provide a long-term remedy towards the Trade deficit problem. It does not have any foreseeable negative impact on the economy of a country. Government should introduce measures to bring about more innovations and incentives to increase investment in industries having potential for exports.
- Investments: Investments are a great way of improving a country’s productivity. This will lead to better trades. This is because, if the productivity of a country is enhanced, its capacity for exporting will improve. So, if India improves its macroeconomic stability, and is able to attract more investments, the exports will improve. This will help the situation of trade deficit of India.
- Managing Consumer Demands: If with the help of some alternatives, and if the economy can afford, there can be some Reductions in government spending, higher interest rates and higher taxes, as these could all have positive effects for Trade deficit situation of India as these measures will lead to lesser consumer demands and thus reduce the demand for imports. This will lead to an increase in spare productive capacity of India which can then be used towards the purpose of exporting.
- Encouraging Business Start-ups: Start-ups should be encouraged to raise productivity in the country. This will help to increase exports and eventually help improve the trade deficit of India. Investments should not become a hindrance for start-ups having the potential for exports.
- Managing Expenditures: With some planning, government can come up with policies that will manage the expenditures and focus more on Exports. The policies can be framed to change and manage the relative prices of Exports and Imports. This will lead to changes in lesser spending of products of imports and more focus and spending towards domestic or export production of India.
India’s Roadmap To Equilibrium
The trade deficit is a simple situation where a country spends more on its imports from other countries than what it gains from its exports. The trade deficit is not as terrible a situation as it sounds. However, this is true only when the deficit is under control and has been there in a country for a short time. When a Trade deficit becomes prolonged for a country, it weakens the economy as different domestic sectors and industries get affected and there is also a rise in unemployment levels. The country loses its self-reliance as the people will learn to depend on foreign products. The quality and quantity of domestic production will worsen, instead of getting improved.
India is in a situation of a Trade deficit. This situation is not alarming yet. The Indian economy suffered a huge blow from the pandemic, and productivity was severely hampered leading to fewer exports. However, now, the economy is recovering at a fast pace, and factually the Exporting situation has greatly improved. With careful measures and planning, and with co-operation and support of the citizens, the situation of Trade deficit will improve. India’s Trade Balance position will improve soon.