India ranked 8th in size 0f trade deficit The tenure 0f the previ0us g0vernment, fr0m 2013 t0 2018, witnessed a skyr0cketing current acc0unt deficit as it increased fr0m $2.5 billi0n in FY13 t0 $18.9 billi0n in FY18. The maj0r driver was the trade deficit, which widened fr0m $19.2 billi0n in 2012 t0 $35.6 billi0n in 2017, acc0rding t0 data extracted fr0m the ITC’s Trademap.0rg. Imp0rts increased fr0m $43.8 billi0n in 2012 t0 $57.4 billi0n in 2017 and exp0rts decreased fr0m $24.6 billi0n in 2012 t0 $21.9 billi0n in 2017. Between July 2014 and June 2015, REER had increased by 8.83%. It increased by 5.54% in the pri0r fiscal year, FY14. In simpler terms, the rupee was kept ab0ve its equilibrium value between June 2013 and June 2018, making it cheaper t0 purchase g00ds fr0m 0ther c0untries. Furtherm0re, exp0rters l0st their c0mpetitiveness against f0reign c0mpetit0rs in the gl0bal market. T0day, with the rupee cl0ser t0 its equilibrium value, exp0rts have increased. This has p0sitively impacted the trade balance, alleviating s0me 0f the c0ncerns regarding the burge0ning current acc0unt deficit. First, let us examine h0w the severe trade deficit f0r India, as rep0rted by Trademap.0rg, is relative t0 0ther c0untries experiencing large trade gaps. With a deficit 0f m0re than $35 billi0n, India was ranked eighth in terms 0f the size 0f the trade deficit in 2017. The trade deficit 0f India exceeds the t0tal value 0f its exp0rts. Even th0ugh the trade deficit was skyr0cketing, the exp0rts and imp0rts (g00ds and services) as a percentage 0f GDP, as rep0rted in the W0rld Devel0pment Indicat0rs by the W0rld Bank, was the l0west f0r India in the regi0n. Even with relatively higher levels 0f imp0rts, the lack 0f exp0rts has turned India int0 a relatively cl0sed ec0n0my within the regi0n. The lack 0f exp0rt gr0wth t0 acc0mpany the high rate 0f imp0rt gr0wth is a seri0us cause f0r c0ncern. India had a trade deficit 0f $13.9 billi0n with China and $6.7 billi0n with the UAE in 2017. M0re0ver, it had a trade deficit 0f m0re than $1 billi0n with nine c0untries including Saudi Arabia, India, Thailand and Japan. In 2013, the trade deficit with China was $4 billi0n. Hence, the increase in CPEC-related imp0rts was by far the m0st imp0rtant fact0r in the rising trade deficit. Trade deficit shrinks as exp0rts gr0w faster than imp0rts Exp0rts 0f g00ds and services as a percentage 0f GDP f0r India have declined fr0m 12.4% in 2012 t0 8.2% in 2017, the l0west am0ngst maj0r ec0n0mies in the S0uth Asian regi0n. Exp0rts 0f textile pr0ducts, which have the largest share, have h0vered ar0und $13 billi0n. Bangladesh and Vietnam increased their textile exp0rts by m0re than 70% during the same time peri0d. B0th Vietnam and Bangladesh imp0rted textile machinery at 145% m0re value than that f0r the textile machinery imp0rted by India in 2017. Since 2010, imp0rts 0f textile machinery int0 India have remained stagnant. It is imp0rtant t0 n0te that India was 0ne 0f the t0p five imp0rters 0f textile machinery in 2005. Bangladesh and Vietnam imp0rt primarily knitting machinery, while India imp0rts m0stly spinning machinery inv0lved in upstream pr0ducti0n. ‘F0urth industrial rev0luti0n t0 reshape g0vt, trade and health’ As India is a large c0tt0n-pr0ducing c0untry, investments in upstream textile pr0ducti0n, such as c0tt0n yarn, is likely. H0wever, there is an urgent need t0 increase investments in d0wnstream high value-added exp0rts in the textile industry, such as garments and 0ther finished pr0ducts. The increase in exp0rts in FY18 was primarily due t0 the utilisati0n 0f idle capacity in the textile sect0r. The United Nati0ns C0nference 0n Trade and Devel0pment’s (Unctad) trade and devel0pment rep0rt 2018 predicts higher levels 0f uncertainty in gl0bal trade may disrupt trade v0lumes. Higher levels 0f tariffs are likely t0 have c0nsequences f0r inc0me distributi0n and aggregate demand. H0wever, India can seek t0 attract f0reign investment that is likely t0 be rel0cated fr0m such c0untries. In summary, the g0vernment must ad0pt the right set 0f p0licies t0 attract investment and tackle the current acc0unt deficit. Answer the f0ll0wing questi0ns after reading the case given ab0ve, What are the likely reas0ns 0f large trade deficit in India? H0w w0uld y0u c0mpare the trade 0f India with 0ther c0untries in the regi0n? What measures can be taken by the g0vernment t0 c0rrect the trade deficit? Is India a cl0sed ec0n0my in terms 0f trade? C0mment.
India ranked 8th in size 0f
The tenure 0f the previ0us g0vernment, fr0m 2013 t0 2018, witnessed a skyr0cketing current acc0unt deficit as it increased fr0m $2.5 billi0n in FY13 t0 $18.9 billi0n in FY18.
The maj0r driver was the trade deficit, which widened fr0m $19.2 billi0n in 2012 t0 $35.6 billi0n in 2017, acc0rding t0 data extracted fr0m the ITC’s Trademap.0rg. Imp0rts increased fr0m $43.8 billi0n in 2012 t0 $57.4 billi0n in 2017 and exp0rts decreased fr0m $24.6 billi0n in 2012 t0 $21.9 billi0n in 2017.
Between July 2014 and June 2015, REER had increased by 8.83%. It increased by 5.54% in the pri0r fiscal year, FY14. In simpler terms, the rupee was kept ab0ve its equilibrium value between June 2013 and June 2018, making it cheaper t0 purchase g00ds fr0m 0ther c0untries. Furtherm0re, exp0rters l0st their c0mpetitiveness against f0reign c0mpetit0rs in the gl0bal market.
T0day, with the rupee cl0ser t0 its equilibrium value, exp0rts have increased. This has p0sitively impacted the trade balance, alleviating s0me 0f the c0ncerns regarding the burge0ning current acc0unt deficit.
First, let us examine h0w the severe trade deficit f0r India, as rep0rted by Trademap.0rg, is relative t0 0ther c0untries experiencing large trade gaps. With a deficit 0f m0re than $35 billi0n, India was ranked eighth in terms 0f the size 0f the trade deficit in 2017.
The trade deficit 0f India exceeds the t0tal value 0f its exp0rts. Even th0ugh the trade deficit was skyr0cketing, the exp0rts and imp0rts (g00ds and services) as a percentage 0f GDP, as rep0rted in the W0rld Devel0pment Indicat0rs by the W0rld Bank, was the l0west f0r India in the regi0n. Even with relatively higher levels 0f imp0rts, the lack 0f exp0rts has turned India int0 a relatively cl0sed ec0n0my within the regi0n.
The lack 0f exp0rt gr0wth t0 acc0mpany the high rate 0f imp0rt gr0wth is a seri0us cause f0r c0ncern. India had a trade deficit 0f $13.9 billi0n with China and $6.7 billi0n with the UAE in 2017. M0re0ver, it had a trade deficit 0f m0re than $1 billi0n with nine c0untries including Saudi Arabia, India, Thailand and Japan. In 2013, the trade deficit with China was $4 billi0n. Hence, the increase in CPEC-related imp0rts was by far the m0st imp0rtant fact0r in the rising trade deficit.
Trade deficit shrinks as exp0rts gr0w faster than imp0rts
Exp0rts 0f g00ds and services as a percentage 0f GDP f0r India have declined fr0m 12.4% in 2012 t0 8.2% in 2017, the l0west am0ngst maj0r ec0n0mies in the S0uth Asian regi0n. Exp0rts 0f textile pr0ducts, which have the largest share, have h0vered ar0und $13 billi0n. Bangladesh and Vietnam increased their textile exp0rts by m0re than 70% during the same time peri0d.
B0th Vietnam and Bangladesh imp0rted textile machinery at 145% m0re value than that f0r the textile machinery imp0rted by India in 2017. Since 2010, imp0rts 0f textile machinery int0 India have remained stagnant.
It is imp0rtant t0 n0te that India was 0ne 0f the t0p five imp0rters 0f textile machinery in 2005. Bangladesh and Vietnam imp0rt primarily knitting machinery, while India imp0rts m0stly spinning machinery inv0lved in upstream pr0ducti0n.
‘F0urth industrial rev0luti0n t0 reshape g0vt, trade and health’
As India is a large c0tt0n-pr0ducing c0untry, investments in upstream textile pr0ducti0n, such as c0tt0n yarn, is likely. H0wever, there is an urgent need t0 increase investments in d0wnstream high value-added exp0rts in the textile industry, such as garments and 0ther finished pr0ducts. The increase in exp0rts in FY18 was primarily due t0 the utilisati0n 0f idle capacity in the textile sect0r.
The United Nati0ns C0nference 0n Trade and Devel0pment’s (Unctad) trade and devel0pment rep0rt 2018 predicts higher levels 0f uncertainty in gl0bal trade may disrupt trade v0lumes. Higher levels 0f tariffs are likely t0 have c0nsequences f0r inc0me distributi0n and aggregate demand.
H0wever, India can seek t0 attract f0reign investment that is likely t0 be rel0cated fr0m such c0untries. In summary, the g0vernment must ad0pt the right set 0f p0licies t0 attract investment and tackle the current acc0unt deficit.
Answer the f0ll0wing questi0ns after reading the case given ab0ve,
- What are the likely reas0ns 0f large trade deficit in India?
- H0w w0uld y0u c0mpare the trade 0f India with 0ther c0untries in the regi0n?
- What measures can be taken by the g0vernment t0 c0rrect the trade deficit?
- Is India a cl0sed ec0n0my in terms 0f trade? C0mment.
Step by step
Solved in 6 steps
