India’s trade deficit has risen to a record US$ 31.02 billion in July 2022. This is mainly because of decrease in merchandise exports and sharp rise in India’s imports. There is a three-fold increase in the trade deficit from US$ 10.63 billion trade deficit, reported in July 2021. The trade deficit for the first four months of the financial year 2022–23 has crossed US$ 100 billion.
India is not the only country which is facing trade deficit. Even super-exporter Germany has recorded its first trade deficit in 30 years, in 2022.
Meaning of Trade Deficit
Trade deficit is the difference between the values of imports and exports. When money spent on imports exceeds that spent on exports in a country, there is trade deficit. Trade deficit could be calculated for different goods and services and also for international transactions. Factors that are responsible for trade deficit include some of the goods not being manufactured domestically but are imported. This leads to an imbalance in trade. A weak currency could also be a cause for trade deficit. If the trade deficit of a country increases then its gross domestic product (GDP) decreases. A higher trade deficit could decrease the value of the local currency and give rise to unemployment.
Reasons for Trade Deficit
The reason for the surge in trade deficit is due to the fact that exports were at a slow pace as compared to imports. According to the data released by the Centre, India’s trade deficit was US$ 26.18 billion in June 2022. However, it rose to US$ 31.02 billion in July 2022. The Ministry of Commerce has attributed the decrease in exports largely to a 7.07 per cent fall in petroleum products, followed by a 28.3 per cent dip in cotton yarn and handloom products, a 94.3 per cent dip in iron ore, and a 2.5 per cent fall in engineering goods. Export of gems and jewellery fell by 5.2 per cent and drugs and pharmaceuticals by 1.4 per cent.
With the growth of exports slowing down and imports continuing to rise sharply driven by higher prices of commodities with inelastic demand, economists expect the current account deficit would cross 3 per cent of GDP in 2022–23 from 1.2 per cent in 2021–22.
Russia’s continuing conflict with Ukraine, since February 2022, has led to rise in prices of commodities across the globe. Also, the effect of inflation is hurting the global growth prospects as well as trade demand. The reason for decline in exports can also be attributed to a slowdown in external demand for engineering products, chemicals, pharmaceuticals, cotton yarn, and plastic products. These four categories are a part of India’s top ten exports.
Imports, on the other hand, have risen. Oil and coal imports have risen due to higher price for oil and India’s domestic coal supply crunch. This compelled power producers to import more oil and coal. Coal imports were up by 242 per cent in June 2022. The volatility in financial markets and the sharp inflation drove the import of gold by 170 per cent. Crude oil imports were over 94 per cent. There was an increase of 31.7 per cent in June 2022 of core imports (non-oil and non-gold imports), prompted by higher inflows of plastics, chemicals, electronics, and vegetable oils.
Way Forward
With several developed economies expected to fall into recession over this year, the dip in exports could get worse in the coming months. The fresh taxes and restrictions imposed on petroleum exports could weaken export volumes further. Coal imports would increase as the production of Coal India has dropped during the monsoon. The weakening of the rupee would continue to make imports costlier. According to economists, more imports than exports would impact the job market, and lead to an increase in unemployment.
The central government is planning to devolve more funds to the states from its share of the divisible pool of taxes. The union government has, therefore, released over Rs. 1.16 lakh crore to states as their share for August which is equal to two monthly instalments of tax devolution. This is in a bid to drive faster spending on capital projects at the ground level. The government is taking continuous steps and engaging with the RBI to bring down the inflation.
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