Syllabus: GS3/ Economy
Context
- According to the Ministry of Commerce and Industry, the country’s trade deficit contracted by more than 54% to $9.9 billion, compared to $21.7 billion in August 2024, due to a sharp rise in merchandise exports.
What is Trade Deficit?
- If a country imports more goods and services from other countries than it exports to them, it is said to have a trade deficit.
- Trade Deficit weakens the domestic currency.
Drivers of the Positive Trade Performance
- Policy support for exports:
- Schemes such as the Production-Linked Incentive (PLI), Remission of Duties and Taxes on Exported Products (RoDTEP), and improved logistics infrastructure under PM GatiShakti have boosted competitiveness.
- Exporters demonstrated resilience even under adverse conditions, such as the 25–50% tariffs imposed by the U.S. in August.
- Strong performance in services sector:
- IT, business process management, fintech, and professional services continue to dominate global demand.
- The net services surplus of nearly $16.7 billion provided a significant cushion to offset the merchandise trade deficit, reinforcing the role of services as a stabiliser in India’s external sector.
- Import moderation:
- Fall in crude oil and commodity prices reduced the import bill.
- Government initiatives to promote domestic manufacturing in electronics, defence, and renewable energy equipment are gradually reducing import dependence.
Implications for the Indian Economy
- Improved external sector stability: A halved trade deficit strengthens India’s current account position, easing concerns over excessive foreign exchange outflows.
- Boost to foreign exchange reserves and rupee stability: Lower trade imbalance reduces pressure on the rupee, supports forex reserves, and bolsters investor confidence.
- Enhanced global competitiveness: India’s ability to grow exports despite tariffs and global headwinds reflects rising competitiveness of its goods and services.
- Contribution to economic growth: Strong export momentum provides a fillip to GDP growth, employment generation, and industrial expansion.
Challenges Ahead
- Global trade uncertainties: Sluggish global growth, supply chain disruptions, and protectionist measures may affect export demand.
- High dependence on a few markets: The U.S. and EU account for a large share of exports, exposing India to geopolitical and policy risks.
- Rising services imports: While services exports are strong, increasing imports in the sector can gradually erode the net surplus.
- Need for technology and value addition: Indian exports remain concentrated in low to medium value-added sectors, limiting long-term competitiveness.
Way Ahead
- Diversification of export markets: Deepen engagement with regions such as Africa, Latin America, and Southeast Asia through Bilateral Trade Agreements and multilateral groupings.
- Promoting high-value exports: Encourage exports in sectors like electronics, green technologies, pharmaceuticals, and defence manufacturing.
- Strengthening services exports: Invest in skilling, digital infrastructure, and regulatory reforms to sustain leadership in IT and professional services.
- Managing imports strategically: Promote domestic capacity-building in critical sectors (semiconductors, rare earths, clean energy) to reduce vulnerabilities.
- Leveraging global supply chain shifts: Position India as a reliable manufacturing hub in the backdrop of China+1 strategies adopted by multinational corporations.
Source: TH
