India’s Trade Deficit Hits Three-and-a-Half-Year Low

India’s merchandise trade deficit reached low of $14.05 billion in February 2025. This decrease is attributed to a sharp contraction in both exports and imports. The decline is influenced by falling global petroleum prices and increasing economic uncertainty due to restrictive trade practices from the United States.

Trade Deficit Overview

The trade deficit represents the gap between imports and exports. In February 2024, the deficit was $19.52 billion. The recent data indicates a notable improvement, attributed to decreased imports and exports.

Export Trends

India’s exports fell sharply by 10.9 per cent year-on-year to $36.91 billion in February. This is the steepest decline in 20 months. The previous year’s high base of $41.4 billion contributed to this drop. Key sectors like gems and jewellery, pharmaceuticals, and chemicals saw declines. However, exports of rice, electronic goods, and readymade garments experienced growth.

Import Dynamics

Imports fell by 16.3 per cent to $50.96 billion. This drop is the largest in 20 months and the first decrease in 11 months. A substantial 29.6 per cent decline in oil imports, which totalled $11.9 billion, heavily influenced this reduction. Gold imports also fell dramatically by 62 per cent to $2.3 billion.

Impact of US Trade Policies

The outlook for India’s exports remains uncertain due to potential reciprocal tariffs from the US. Starting April 2, 2025, the US plans to impose tariffs on various trading partners. A 25 per cent duty on steel and aluminium imports is already in effect. This situation has led American importers to hold back orders, further complicating India’s export landscape.

Sectoral Performance

Non-petroleum and non-gems-and-jewellery exports fell by nearly 5 per cent to $28.57 billion. However, some sectors showed resilience. Services exports rose by 23.6 per cent to $35.03 billion, indicating growth in the service sector amidst overall trade challenges.

Future Projections

Despite the challenges, India aims to achieve $800 billion in combined exports of goods and services. In the previous financial year, the total was $778 billion. Economists predict a current account surplus of about $5 billion in Q4FY25, equivalent to roughly 0.5 per cent of GDP.

Strategic Recommendations

Industry leaders suggest a need for targeted initiatives to enhance India’s global competitiveness. Diversifying exports and exploring new markets is crucial. A focused approach is essential to revitalise export growth and maintain trade facilitation measures.

Questions for UPSC:

1. Critically discuss the implications of the trade deficit on India’s economy.
2. Examine the factors contributing to the decline in India’s exports during 2025.
3. Analyse the impact of US trade policies on global trade dynamics.
4. Estimate the potential effects of a current account surplus on India’s economic growth.

Answer Hints:

1. Critically discuss the implications of the trade deficit on India’s economy.

1. A trade deficit indicates higher imports than exports, which can lead to currency depreciation.
2. It may result in increased foreign debt if financed through external borrowing.
3. A persistent deficit can affect investor confidence and economic stability.
4. However, a declining trade deficit can signal improved economic conditions and domestic production.
5. It may also create opportunities for domestic industries to fill gaps left by reduced imports.

2. Examine the factors contributing to the decline in India’s exports during 2025.

1. Global economic uncertainty has led to reduced demand for Indian goods.
2. The high base effect from last year’s exports contributed to the year-on-year decline.
3. Restrictive US trade policies and potential tariffs have created a challenging export environment.
4. Key sectors like gems, jewellery, and pharmaceuticals have faced downturns.
5. Increased competition from other emerging markets has also impacted India’s export performance.

3. Analyse the impact of US trade policies on global trade dynamics.

1. US tariffs can lead to retaliatory measures from affected countries, escalating trade wars.
2. Such policies disrupt supply chains and increase costs for global manufacturers.
3. They may shift trade patterns, as countries seek alternative markets and suppliers.
4. US importers holding back orders can lead to reduced economic activity in exporting nations.
5. Long-term impacts may include a decline in global trade growth and increased protectionism.

4. Estimate the potential effects of a current account surplus on India’s economic growth.

1. A current account surplus can strengthen the domestic currency, enhancing purchasing power.
2. It may reduce reliance on foreign debt, improving financial stability.
3. Surplus can attract foreign investment, boosting economic growth and development.
4. It can provide a buffer against external shocks, enhancing resilience in the economy.
5. However, sustained surpluses may lead to trade tensions with other countries seeking balanced trade.