Teaching Assistant & Analyst, Bharti Institute of Public Policy, Indian School of Business
India’s recent merchandise trade trends have been rife with the soaring trade deficit. Trade deficit refers to a situation wherein a country’s imports exceed its exports. The behaviour of trade deficit can have far-reaching spillovers, impacting the macro indicators of the economy. It leads to an outflow of foreign currency, and affects the terms of trade, ultimately leading to the depreciation of the domestic currency. The consequences of currency depreciation include an increase in the cost of imports, which further leads to an increase in the volume of trade deficit, and may reduce domestic purchasing power.
The Recent Trends
This causality has been noted in the case of India recently, wherein the trade deficit has been growing, and the value of Indian currency has constantly been depreciating. This growth in trade deficit has been the single most contributing factor in the short term to impact the value of Indian currency. India’s merchandise trade deficit for April-October 2022 was estimated at USD 173.46 Billion as against USD 94.16 Billion in April-October 2021, indicating an 84.2% increase in the trade deficit over the past one year (Figure 1). India’s trade deficit in the present quarter has been the highest ever and is the most significant contributing factor to the depreciation of the Indian Rupee. As noted in Figure 2, the exchange rate of USD to INR has increased from 75.5 in December 2021 to 81.5 as of November 2022, an 8% increase during the one year.
Figure 1: India’s Merchandise Trade Deficit:
A Comparative Analysis of Apr-Oct 2021 and Apr-Oct 2022
Source: Ministry of Commerce, GoI, Press Release October 2022
Figure 2: USD to INR Exchange Rate December 2021 to November 2022
Source: Retrieved from https://www.exchangerates.org.uk/USD-INR-exchange-rate-history.html on 9/12/22
While a healthy trade deficit is often considered as a sign of a growing economy, with an increasing aggregate demand, excessive and glaring trade deficit situation can lead to numerous negative impacts. The notion of export as an ‘engine of growth’ has time and again been emphasised by economists. Hence, the issue of glaring and persistent increase in trade deficits require policy interventions by way of supporting domestic industries, identifying highly competitive domestic industries and export promotion policies. Such steps in the right direction would act as a supplement to India’s growth story, and also help to stabilise India’s falling exchange rate.