TRADE DEFICIT (Syllabus: GS Paper 3 – Economy)

Context: India’s trade deficit narrowed to to a three month low of $19.8 billion in December from $20.6 billion in November and $23.14 billion in December 2022 as global demand for India’s electronics and engineering goods rose while imports eased due to falling commodity prices.

Trade Deficit

• About: When a nation's imports exceed its exports within a fiscal year, it is identified as a trade deficit. An alternate term for this negative balance of trade is the "trade deficit."
• Scope: The term "trade deficit" encompasses the volume of international trade occurring between countries globally.
• Components: Various products, services, and foreign transactions, including the current account, financial account, and capital account, contribute to the computation of trade deficits.
• Tracking International Transactions: International transaction accounts with negative balances, such as the balance of payments, meticulously monitor all monetary transactions between a country's residents and non-residents.

Causes of Trade Deficit

• Arises when a nation lacks the capability to produce required goods and resorts to importing, accompanied by the payment of import taxes.
• From businesses engaging in production abroad, exporting raw materials used in manufacturing while importing the final goods.

Impact of Trade Deficit

• A trade deficit can elevate the standard of living as residents gain access to a broader array of products.
• It compel the government to acquire additional foreign exchange, leading to local currency depreciation.
• To rectify import-export disparities, a larger trade deficit necessitates attracting foreign investors.