India's Trade Deficit Scenerio (FY10 to FY20)

Despite economic reforms in the Indian economy from time to time, one problem has stayed intact, untouched by the reforms, and that is—the trade deficit, which is the excess of imports over exports.

If the recent economic initiatives are brought to the focus, it shows tremendous emphasis by the Government of India to invigorate the production landscape of the country.

Measures involving Goods and Services Tax (GST) implementation, infusing capital to public sector banks, services sector incentives, efforts to ease doing business, and impetus to domestic production, say a lot about the government’s intent to tame the trade deficit by boosting exports and reducing imports.

However, there has been no correction in the trade deficit scenario in India. An analysis shows that the trade deficit in India has grown at a CAGR of 3.5 percent from FY10 to FY20, which underscores the need to actuated impactful measures to reverse the trend to benefit the country.
               

Causes of Trade Deficit in India

Two predominant factors are the primary causes of the trade deficit in India. India’s import dependency regarding crude oil and other commodities, including chemicals and metals, and the problematic export scenario are the root causes of imports surpassing exports fiscal after fiscal.

India is a net importer of crude oil, chemicals, and other commodities, and the volume of the imports has kept increasing to widen the gap between inflow and outflow of trade.

Exports from India also show a grim picture. Raw materials are the key export items of India, and the downside is that they fetch lesser values, despite higher export volumes, than manufactured goods, which are more secondary in the country’s export basket.

When it comes to the performance of manufactured products of India in the global markets, the picture is discouraging.

Demand for Indian manufactured products is less in international markets, and the critical retarding force is China, which has an advanced manufacturing base.

With good government policies, favorable labor laws, and availability of skilled labor, China is the most preferred manufacturing hub in Asia and manufactures competitively priced products to do well in the global markets.

India’s production is capital intensive, which is a reason behind the higher prices of manufactured products. And that makes Indian products less appealing for international buyers, who tend to import instead from China due to the cost advantage, among other factors.

Besides, there are other factors as well. The protectionist approach of developed countries, putting barriers against imports, to flourish their domestic industry also adds to the trade deficit in India.

The Final Words

Reversing the trade deficit in the country is, however, not an impossibility. Any initiatives on how to reduce the trade deficit in India will, however, pose grave challenges. The government can prioritize strengthening the country’s manufacturing base and lower corporate taxes, which will lower the production costs to bring down the final product costs.