How India’s Persistent Trade Deficit Affects Us

Record High Deficit Reported; Can We Blame It on Diwali?

Newsreel Asia Insight #46
Nov. 17, 2023

India’s trade scenario in October presented a startling revelation. The country’s merchandise trade deficit, a measure of how much more we import than we export, hit a record high of $31.46 billion, after months of persistent high deficit. It depicts the bad health of our economy.

Let’s break down the numbers. Our exports were valued at $33.57 billion in October. And our imports soared to $65.03 billion, Reuters quoted trade ministry officials as saying on Nov. 14. A significant factor behind this surge was our cultural affinity for gold, the officials said.

In October, during our festive season, gold imports reportedly skyrocketed by 95% compared to last year, reaching $7.23 billion. After all, Diwali is a time when buying gold is considered auspicious.

This tradition, while culturally significant, has an enormous economic impact.

Comparing this to last year’s figures, we see a stark difference. In October 2022, our exports were $31.60 billion against imports of $57.91 billion, according to the newswire. The gap was there, but not as wide.

Further, it’s not just because of Diwali. From April to October 2023, our exports totalled $244.89 billion, and our imports were at a staggering $391.96 billion, according to Reuters data. It’s a trend that’s been growing, and it’s a trend that needs our attention.

Now, why it matters. Consider the analogy of running a lemonade stand, where buying ingredients represents imports and selling lemonade symbolises exports. Spending more on ingredients than earnings from sales mirrors a trade deficit situation.

Among other things, this gap can lead to depreciation of the rupee.

To pay for the imports, we need more foreign currency than we have because we are not receiving as much from our exports. And as demand for foreign currency increases, the value of our own currency can go down in comparison. This, in turn, can make essential imports like oil and electronics more expensive, which can further ripple through the economy, affecting everything from fuel prices to the cost of goods and services.

Moreover, in the global economy, a country with a persistent trade deficit is viewed as a place where money is flowing out more than it’s coming in. This puts a question mark over its economic health and sustainability. As a result, other countries and international investors can be reluctant to invest.

In addition to lower investment, India might face higher borrowing costs, be it domestic borrowing through bonds and treasury bills, or international borrowing from the World Bank, the International Monetary Fund, foreign governments or sovereign bonds in the international market. This can affect the government’s ability to finance projects and can impact economic growth.

When a country consistently imports more than it exports over a period, governments might need to implement policy changes.

These can include fiscal policies. The government may increase or decrease its spending – like you deciding to buy more lemons or cut back on sugar – or change taxes,  which is similar to adjusting the price of your lemonade. By doing this, the government aims to influence the economy. For example, if the government spends more, it can boost the economy, potentially increasing the demand for local products. The aim is to either curb import levels or boost exports.

The government may change interest rates, making it cheaper or more expensive to borrow money. Lower interest rates can encourage people and businesses to spend or invest more, which might lead to increased production and export of goods.

For a balanced trade scenario, it’s crucial for both the government and citizens to first recognise the challenges facing our economy, rather than clinging to misleading narratives of growth. Acknowledging these realities is the first step towards fostering a stable and thriving economic environment for everyone.