Trade Sector Updates – Falling Exports, TIES, MEIS, Foreign Trade Policy, etc.

Why India’s trade deficit is not necessarily a weakness?

Explained | Economics | Mains Paper 3: Effects Of Liberalization On The Economy, Changes In Industrial Policy and their effects on Industrial Growth
Note4Students

From UPSC perspective, the following things are important :

Mains level: Balance of Payment;

Why in the News?

India’s ongoing trade deficit, where imports exceed exports, is often viewed as a sign of weakness in Indian manufacturing.

What is the nature of India’s trade deficit?

  • Trade Deficit in Goods: As of October 2024, India recorded a merchandise trade deficit of $27.1 billion, which narrowed from $31.5 billion in the same month the previous year.
  • Net Exporter of Services: India has established itself as a significant player in the global services market, with services exports constituting a substantial portion of its overall trade.
    • In FY 2023-24, India’s services exports amounted to approximately $309 billion, contributing significantly to offsetting the goods trade deficit
  • Foreign Capital Inflows: The trade deficit is often viewed positively as it correlates with India’s ability to attract foreign investment.
    • For instance, India’s current account deficit was about 1.1% of GDP in June 2024, indicating that capital inflows are necessary to balance this outflow.
  • Current Account Balance: The current account deficit (CAD) reached approximately $9.7 billion in the April-June 2024 quarter, reflecting the need for capital inflows to support economic growth and stability.
    • India’s current account deficit has been maintained at around 2% of GDP, which is generally considered manageable within the context of its economic growth and investment strategies.

Why do we hold reserves?

  • Cushion Against Economic Shocks: Reserves are held as a safeguard against potential economic disruptions, such as sudden spikes in oil prices that could worsen the current account deficit.
  • For Cost Management: While holding reserves incurs costs (e.g., lower returns on reserves compared to returns on foreign investments), they are essential for maintaining economic stability and investor confidence.
  • Optimal Level of Reserves: India aims to maintain adequate reserves without excessive accumulation. This involves balancing the need for emergency funds against the costs associated with holding those reserves.

What are the Steps taken by the Government? 

  • Make in India Initiative: Launched in 2014, this initiative aims to boost domestic manufacturing by encouraging both foreign and domestic companies to manufacture their products in India.
    • It focuses on sectors such as electronics, automobiles, and pharmaceuticals to increase production capabilities, reduce dependency on imports, and enhance export competitiveness.
  • Production-Linked Incentive (PLI) Scheme: Introduced in 2020, the PLI scheme provides financial incentives to manufacturers across various sectors, including electronics, textiles, and pharmaceuticals.
    • This program is designed to attract investments, promote local manufacturing, and increase exports by enhancing the global competitiveness of Indian products.

What strategies can mitigate the effects of the trade deficit? (Way forward)

  • Boosting Domestic Demand: Encouraging greater domestic consumption can help increase manufacturing output. Rising domestic demand can lead to higher production levels without necessarily increasing imports.
  • Enhancing Export Competitiveness: Focusing on sectors where India has a comparative advantage, such as pharmaceuticals and automobiles, can help increase export volumes and reduce the trade deficit.
  • Diversifying Import Sources: Reducing reliance on specific countries for imports (e.g., crude oil) by diversifying sources can help stabilize import costs and mitigate fluctuations in global prices.
  • Investing in Manufacturing Capabilities: Strengthening domestic manufacturing through policies supporting local industries can reduce import dependency and enhance export capacity.

Mains PYQ:

Q Craze for gold in India has led to a surge in the import of gold in recent years and put pressure on the balance of payments and the external value of the rupee. In view of this, examine the merits of the Gold Monetization scheme. (UPSC IAS/2015)

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