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Thursday, August 2, 2012

Why India has Trade Deficit

Simply Put, Trade Deficit is nothing but the negative BOT (Balance of Trade). Though Trade Deficit (TD) is similar to to the CAD (current account deficit) but unlike CAD while calculating the TD investment incomes and foreign aids are excluded.

India's imports are continuously rising in comparison with the exports and this is the sole reason for the rising trade deficit.

Crude and Gold constitute around 40% of the total imports.

Demand for the crude and natural gas has been continuously rising in India and higher international crude prices result in higher trade deficit. India imports nearly around 80 % of its total crude requirement through imports. 

Reliance on the crude can't be replaced by the bio fuel for two reasons-

(1) vehicles running on the Bio fuel like Ethanol etc gives lesser average and emits higher carbon emissions. 

(2) higher usage of bio fuels shall exert an upward pressure on the food items and as India is already grappled with the rising food inflation this move could aggravate the situation further.

To curb the burgeoning gold imports Indian government has taken a few measures but to no avail. Gold having given fabulous return in the past, has now turned into an indispensable asset class and investors are meticulously investing in gold in physical as well as paper form (gold ETF, e-gold, gold mutual funds).

Besides gold and crude, coal and fertilizer imports were next in line for the bulging trade deficit. Euro debt crisis and the recession in the USA hampered the Indian Exports (Auto, IT etc) to these territories.
Lesser exports added to the widening of the trade deficit.

Impact of the Trade Deficit

(1) Widening trade deficit was one of the reasons for the rupee falling against the dollar as it resulted in the higher outflow of the dollar.
(2) Higher trade deficit might result in the BOP crisis like the one we had in early nineties when India had limited foreign exchange left to support the oil import for one week only.
(3) Higher trade deficit made the rupee weaker and the helped the inflation to rise.


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