Tripping trade: on India and its trade stance

Context

Indian goods exports slumped to $34.6 billion in April, the lowest since last October and Imports shrank by a sharper 14% to trip to a 15-month low of under $50 billion thereby witnessing a trade deficit.

Implications

Deepening of Contraction: Both exports and imports have seen a deepening of the pace of contraction. Merchandise exports fell by 8.8% in February, while imports declined by 8.2% in the same month. These figures follow a decline of 6.6% and 3.6% in exports and imports respectively in January.
Narrowing Trade Deficit: The contraction has led to a further narrowing of the trade deficit to $17.4 billion in February.
Impact on Export Destinations: The report by Nomura reveals that the sharpest declines have been observed in India’s exports to the US, China, Japan, and the rest of Asia.
Overall Growth: The higher export growth in the first half of the financial year has pushed overall growth for the year so far (April-February) to 7.55%.

Sectors Affected

Exports side:

The disaggregated data reveals that core exports, which exclude exports of oil, gold, and gems and jewellery, have continued to contract.
16 out of the 30 main export segments have fallen in February, including labour-intensive segments such as leather and textiles.
Non-oil non-gems and jewellery exports are almost at the same level as last year.

On the imports side:

Core imports, which exclude oil, gold, and gems and jewellery, have also continued to contract.
This points out towards a softening of imports of consumer and investment goods, indicative of weakening domestic demand.

Trade deficit:

A trade deficit is an amount by which the cost of a country’s imports exceeds its exports. It’s one way of measuring international trade, and it’s also called a negative balance of trade.
A trade deficit can be calculated by subtracting the total value of a country’s exports from the total value of its imports.

Potential Effects of a Trade Deficit:

Lower prices: A country may have a trade deficit because it is cheaper to purchase goods internationally than to produce them at home. This means that prices of consumer goods and services may decrease.
Weakening currency: A trade deficit has the potential to weaken a country’s currency.
Deflation: A country that has a trade deficit is sending a portion of its currency overseas. This can cause deflation, a state in which reduced demand leads to lower prices.
Changes in employment: If a country imports more than it exports, unemployment may increase. For example, if a country shifts from manufacturing cars to importing cars from international car manufacturers, the job market for car manufacturing will be negatively impacted.
Decrease in GDP: Trade deficit is one factor used to calculate a country’s Gross Domestic Product (GDP), a measure of the size of the economy. If the trade deficit increases, the GDP decreases.

Conclusion

A small trade deficit is necessary for the development of the country as it increases demand, consumption and in turn, causes economic growth. However, an unchecked trade deficit can lead to overdependence of the economy on imports, and any small disturbances in the geopolitical scenario and supply chain will create a ripple effect and causes widespread inflation which is unsustainable.

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