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India’s trade deficit has widened to a record $31.02 billion in July thanks to contracting merchandise exports and a rise in imports.
This is a three-times increase from the $10.63 billion trade deficit reported in July last year.
What is a Trade Deficit?
- A trade deficit is an economic measure of international trade in which a country’s imports exceed its exports.
- A trade deficit represents an outflow of domestic currency to foreign markets.
- It is also referred to as a negative balance of trade (BOT).
- Trade Deficit = Total Value of Imports – Total Value of Exports
Current Status of India’s Trade Deficit?
- Exports in July 2022 remained flat at $35.24 billion ($35.51 billion in July 2021),
- Import in July 2022 was $66.26 billion, a rise of 43.59% over $46.15 billion in July 2021
- Trade deficit widened to $31 billion in July 2022, with a sequential decline in exports and flattish imports
Reason for increasing imports and decreasing exports 2022
Increasing Imports
- Energy Sources:
- Petroleum and coal were the major contributors to India’s imports in July.
- India imported petroleum products of $21.13 billion in July, which is 70% higher than last year.
- Similarly, coal imports rose 164% to $5.18 billion in July.
- Gold imports
- The volatility in financial markets and the sharp inflation have also driven up imports of gold — considered a haven and hedge against price rise.
- Electronic Goods
- Rising demand for electronic goods, including mobile phones and computers, contributed to rising import bills and widening trade deficit.
- Others:
- The value of non-petroleum imports was $45.13 billion in July 2022, with a positive growth of 33.74% over non-petroleum imports of $33.74 billion in July 2021
- Spurred by higher inflows of plastics, chemicals, electronics and vegetable oils.
Slowing Exports
- Weak trade demand
- While Russia’s ongoing conflict with Ukraine has propped up commodity prices globally, the spillover effects of runaway inflation are harming global growth prospects and trade demand.
- Engineering Products
- Underlying slowdown in external demand leads to weakening exports of engineering products, chemicals, pharmaceuticals, cotton yarn and plastic products.
- Gems and jewellery
- Exports of gems and jewellery were affected by muted consumer demand in several key markets.
- The US is one of the biggest consumers, and since the US is in a technical recession, exports of gems, jewellery, and readymade garments may continue to be muted for some months.
- Others:
- Although exports of readymade garments, electronics and rice remained healthy, non-oil exports fell for the second successive month in June on a seasonally adjusted basis
Impact of Trade Deficit
- If the trade imbalance remains, the government will have to obtain additional foreign exchange to close the gap, causing the local currency to fall.
- To close the import-export imbalance, a larger trade deficit necessitates the recruitment of foreign investors.
- Because more imports mean fewer job prospects, a bigger trade imbalance causes jobs to be outsourced to other countries.
- Demand for imported items leads to decreased demand for locally produced goods, resulting in factory closures and job losses.
Is it bad for a country’s economy?
- If the trade deficit increases, a country’s GDP decreases.
- A higher trade deficit can decrease the local currency’s value.
- More imports than exports, according to economists, impact the jobs market and lead to an increase in unemployment.
- If more mobiles are imported and less produced locally, then fewer local jobs will be in that sector.
Pic Courtesy: freepik
Content Source: The Hindu