The Indian government recently disclosed preliminary data that revealed a widening of the country’s trade deficit in goods to USD 14.11 billion in March 2021 from USD 9.98 billion during the same time the previous year.
Key Points and Observations
The merchandise exports of India for March 2021 were USD 34.0 billion as opposed to USD 21.49 billion in March 2020, reflecting an upward trend of 58.23%. This is a record-setting number, signifying that Indian exports for the first time exceeded USD 34 billion in a single month.
In terms of the country’s merchandise imports, the figure stood at USD 48.12 billion compared to USD 31.47 billion in March 2020, marking an uptick of 52.89%. Consequently, India was a net importer in March 2021 with a trade deficit amounting to USD 14.11 billion.
Reasons Behind Increased Imports
The main factors contributing to the upsurge in demand for goods and consequently imports include the relaxation of lockdown policies and the revival of economic activities. The rise in global trade has led to the activation of the global supply chain and commerce is now in full swing. The resumption of transportation sector activity prompted an increase in oil imports.
About Trade Deficit
A trade deficit arises when the cost of a country’s imports exceeds its exports. It denotes rising demand in the economy and is part of the Current Account Deficit.
Current Account Deficit: Definition and Components
The current account encompasses exports and imports in goods and services as well as transfer payments, encompassing a nation’s transactions with other countries. Part of a country’s Balance of Payments (BOP), it shows a deficit if imports’ value outstrips exports. Its main components include goods, services, net overseas investment earnings (such as interests and dividends), and net transfer payments over a period of time, like remittances.
Balance of Payments: Definition and Components
The Balance of Payment (BoP) of a country is essentially a systematic record of all its economic transactions with the rest of the world during a specific period, usually a year. For framing BoP accounts, a country’s economic transactions with the rest of the world are categorized under Current account, Capital account, Financial Account, and Errors and Omissions. It also depicts changes in Foreign Exchange Reserves.
The current account includes merchandise export and import (also called trade balance) and non-merchandise which includes services, transfers, and income. The capital account and financial account reflect a country’s capital income and expenditure, providing a summary of the net flow of private and public investment into an economy.
Errors and Omissions
There are times when the balance of payment doesn’t balance out. This imbalance is depicted in the BoP under errors and omissions, indicating the country’s inability to accurately record all international transactions. If this situation arises, it can be rectified by taking money from the Foreign Exchange Account. However, if the reserves in the forex account fall short, then this scenario signifies a BoP crisis.