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India’s massive trade deficit may be on the path to improvement

India’s massive trade deficit may be on the path to improvement

By Snigdha Kalra

Trade deficit refers to the excess of a country’s imports over its exports. India has a huge trade deficit with other countries, especially China, a problem that it aims to resolve on a priority basis. A report published by Morgan Stanley suggests that India’s trade deficit in August 2017 may improve from that in July. August is expected to witness a fall in both exports and imports, which may reduce the trade deficit to USD 10.3 billion. Research estimates a moderation of export growth to 3.4% year-on-year in August, from 3.9% in July, and imports of 11.3% in August, from 15.4% in July.

The trade deficit situation in India

India has witnessed a growth in exports in recent times. At the same time, it has witnessed a much higher growth in imports, mainly due to the import of oil and gold. The trade deficit in India stood at USD 13.24 billion in April 2017, owing to a sharp rise in gold and crude oil imports. The gold imports amounted to USD 3.85 billion, as compared to USD 1.23 billion in the same month, a year ago.

The month of July saw some moderation, as India’s exports grew by 3.94%, the lowest in eight months. However, the imports grew sharply by 15.42%, leaving a trade deficit of USD 11.44 billion, as compared to USD 7.76 billion in July 2016. Gold imports increased by 95%, while oil imports rose by 15% in this month.

The India-China trade deficit

A major chunk of India’s trade deficit is caused by imports from China. The trade deficit with China stood at USD 51.02 billion in 2016-17. Under the shadow of the recent India-China standoff at Doklam, this massive trade deficit becomes a serious concern for India. Suggestions like undertaking a boycott of Chinese products may be conducive to enforcing a nationalist spirit and making people aware of the situation. However, these will not help much in actually overcoming the real problem, which is that India lacks a competitive manufacturing sector. It is mainly an exporter of raw materials to China and an importer of finished products.

Role of the Indian government

It seems like the government is looking into this problem. The Commerce and Industries Minister, Suresh Prabhu, announced on Saturday, September 9, that the two countries had agreed to set up industry-specific working groups in order to promote exports from India. He had also invited Chinese FDI in India to help reduce the trade gap.

The situation, if it keeps worsening, will have an adverse impact on the strategic relationship with China. Apart from this, India needs to reduce the trade gap and prevent it from rising to exponential levels, lest it becomes unmanageable. Programmes like the Merchandise Exports from India Scheme (MEIS) and the Service Exports from India Scheme (SEIS) can help in the promotion of exports. Moreover, we need to make both the manufacturing sector and Indian goods more competitive in the international market. This will bring about a structural overhaul in exports and, in the longer run, help in overcoming the disadvantages that India faces today.

Featured Image Source: Pixabay

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