From UPSC perspective, the following things are important :
Prelims level: Economic Impact of Trade Deficit
Why in the News?
India’s goods trade deficit has dropped to a 42-month low of $14.05 billion in February 2025, driven by reduced imports of gold, silver, and crude oil, according to the latest data from the Ministry of Commerce and Industry.
Key Insights from February 2025 Trade Data
- Exports: Goods exports amounted to $36.9 billion in February 2025.
- Imports: Merchandise imports fell to a 22-month low of $50.9 billion, primarily due to lower demand for gold, silver, and crude oil.
- Gold and Silver Imports: The value stood at $2.7 billion, the lowest since June 2024.
- Crude and Petroleum Imports: Reduced to $11.89 billion, marking the lowest level since July 2023.
- On a year-on-year basis, exports dipped by 10.84% in February 2025, partially due to the base year effect of a leap month.
- However, imports shrank by 16.3% compared to February 2024.
Impact of Lower Trade Deficit on India’s Economy
- Stronger Currency: A lower trade deficit reduces demand for foreign currencies, leading to an appreciation of the Indian Rupee. This makes imports cheaper, benefiting consumers and businesses.
- Improved Current Account Balance: The lower trade deficit positively impacts India’s balance of payments, reducing dependence on external borrowing or foreign investments, and contributing to financial stability.
- Boost to Domestic Production: A decrease in imports encourages local manufacturing and reduces reliance on foreign products, stimulating economic growth and creating jobs.
- Growth in Exports: The reduced deficit reflects a higher level of exports, improving India’s foreign exchange reserves and supporting industrial output.
- Reduced Inflation: With fewer imports, particularly of essential goods like crude oil and gold, prices of imported goods stabilize, helping reduce inflationary pressures in the economy.
- Better Fiscal Health: A lower trade deficit leads to less reliance on external financing, helping the government maintain fiscal stability and potentially improve credit ratings.
- Positive Investor Sentiment: A smaller trade deficit enhances investor confidence, attracting Foreign Direct Investment (FDI) and Foreign Portfolio Investment (FPI), boosting economic development.
- Focus on Self-Reliance: Reduced imports drive self-reliance, encouraging domestic production, and decreasing dependency on imports for essential goods and services.
PYQ:[2020] With reference to the international trade of India at present, which of the following statements is/are correct? 1. India’s merchandise exports are less than its merchandise imports. 2. India’s imports of iron and steel, chemicals, fertilisers and machinery have decreased in recent years. 3. India’s exports of services are more than its imports of services. Select the correct answer using the code given below: (a) 1 and 2 only (b) 2 and 3 only (c) 1 and 3 only (d) 1, 2 and 3 |
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