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India’s trade deficit surges to over $31 bn

  • Published
    4th Aug, 2022
Context

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

About
  • 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.

Current Account Deficit (CAD)

It has two parts:

  • Trade account (Import and Export of goods):
    • If a country imports more goods than it exports, it is said to have a trade account deficit.
  • Invisible account (Import and export of services):
    • If the net effect of a trade account and the invisibles account is a deficit, then it is called a current account deficit or CAD. A widening CAD tends to weaken the domestic currency because a CAD implies more dollars (or foreign currencies) are being demanded than rupees.

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.
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