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15th June 2024 (10 Topics)

India Trade Deficit Widens

Context

India’s merchandise trade deficit widened to a seven-month high in May, driven largely by a surge in imports, according to official data released by the commerce ministry.

What is Trade Deficit?

  • Trade deficit refers to a scenario in international trade where a country's expenditures on imports exceed its earnings from exports. It is also termed as a negative balance of trade.
  • Components of Trade Deficit Calculation: The calculation of trade deficit encompasses various transactions in international trade:
  • Goods and Services: Includes imports and exports of physical goods and intangible services.
  • Capital Account Transactions: Involves asset transfers like trademark rights or mining rights.
  • Current Account Transactions: Encompasses primary income (e.g., dividends, interest, remittances) and secondary income (e.g., private remittances, pension payments).
  • Impact of Trade Deficit: Trade deficit affects a country's balance of payments, reflecting all international transactions. It indicates the economic health concerning global interactions.
    • Consumption Patterns: Reflects residents' ability to purchase more goods than produced domestically.
    • Capital Account: Indicates foreign currency financing through loans and investments.

Advantages and Disadvantages of Trade Deficit

  • Advantages:
    • Availability of Goods: Ensures ample supply of imported goods for domestic consumption.
  • Disadvantages
    • External Payments Pressure: Puts strain on a country's external financial obligations.
    • Currency Pressure: Affects the stability and value of the country's currency.

Government Response: Governments may adjust import-export policies, impose tariffs, or encourage domestic production and exports.

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