India’s trade deficit surges to over $31 bn

India’s trade deficit has widened to a record $31.02 billion in July thanks to contracting merchandise exports and a rise in imports.

• The trade deficit for the month was provisionally estimated at a record $31 billion against $25.6 billion in June and at $100 billion for the first four months of the financial year.
  

Causes of present Trade deficit:

• In the current instance, government intervention to control exports of petroleum products and certain commodities due to domestic demand and inflation contributed to the widening of the trade deficit.
• Earnings from petroleum product exports declined by $2.4 billion in July from $7.83 billion in June 2022.
  • This primarily because the Indian government imposed an export cess on petrol and diesel and global prices cooled amid concerns about economic growth in the US and China.
• Exports of gems and jewellery were affected by muted consumer demand in several key markets.
  • The US is one of biggest consumer and since the US is in a technical recession, exports of gems and jewellery and readymade garments may continue to be muted for some months.
• Coal imports were another transaction that contributed to the import bill and the widening of the trade deficit this financial year.
• Rising demand for electronic goods including mobile phones and computers contributed to rising import bills and widening trade deficit.

What is a trade deficit?

• A trade deficit is an amount by which the cost of a country's imports exceeds its exports.
• Simply put, trade deficit or negative balance of trade (BOT) is the gap between exports and imports.  When money spent on imports exceeds that spent on exports in a country, trade deficit occurs.
• It is one way of measuring international trade, and it's also called a negative balance of trade.
• This deficit occurs when a country does not produce everything it needs and borrows from foreign states to pay for the imports. That's called the current account deficit.

What does a Deficit mean for an Economy?

• A deficit implies that more money is going out of the country than coming in via the trade of physical goods. Similarly, the same country could be earning a surplus on the invisibles account — that is, it could be exporting more services than importing.
• Definition of Stagflation: Stagflation is defined as an economy that is suffering both an increase in inflation and low growth.
• Stagflation was initially identified in the 1970s, when an oil shock caused fast inflation and significant unemployment in many industrialised economies.
• The latest RBI report also point out that “even as the world was looking at a distinct possibility of widespread stagflation, India was at low risk due to its stabilisation policies.”