Indias Trade Deficit

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Research question: How has the lowering of the trade deficit affected the economy of India? In September India have received certain good news for an economy that has not being doing so well due to inadequate infrastructure, a plummeting currency and a large current account deficit. It is indicated that Indias trade deficit has just reached its lowest level since 2011. The trade deficit has lessened from $10.9 billion to $6.7 billion. There are various reasons as to why this has occurred. Their exports have increased 11.2 percent, showing the third consecutive month of double digit increase. While the exports have increased, the Indian imports have dramatically decreased 18.1 percent. They have achieved this by lowering their imports on precious metals and increasing their exports. India is a country that is heavily dependent on various imports such as oil, gold and other products that help to sustain their country. Due to their dependency on such imports India have always had a very high trade deficit, which means theyre dependent on other countries for their goods. Trade deficits are a problem because it means that there are less jobs in the country, because more money is being spent on foreign products. Peoples wages are significantly lowered in these situations, because there are less jobs in the country, people are forced to find lesser paying jobs, due to the fact that theyre the only jobs they can get. If wages are lowered, standard of living is also lowered, which is another consequence of trade deficit. Yet another consequence of trade deficit is that it restricts GDP growth. The reason India has been able to maintain such an exorbitant trade deficit is because of the FDI from other countries that see the potential of the Indian economy. The issue with this is that if foreign investors begin to doubt the possibility of India becoming a strong economy, they will begin

to stop importing Indian products which in turn cause the Indian rupee to drop further, which would be devastating to their country, their trade deficit would expand phenomenally because they would need to import more to compensate. Basically without FDI, the Indian would collapse. After realizing their dire situation, India employed a new governor of the Central Bank to deal with it. In an effort to contract the trade gap, they have decreased the imports of non-essential items such as precious metals which decreased their imports by 18.1 percent. They have raised the tax on the imports of gold (tariffs) which in turn cut down the import. A consequence of this is that products like gold are now being imported through unofficial channels. The tariffs are good because that promotes the usage of domestic industries, while decreasing imports, to help balance out trade deficit. The negative side of using tariffs is that it isnt an incentive for domestic industries to strive to challenge foreign industries that India would normally import from due to the fact that the government is making it easy for these domestic industries. As well as attempting to lower their imports, the Indian economy has successfully attempted to increase their exports, which have jumped up by 11.2 percent. Because the rupee was so weak earlier, people were interested in Indian goods because they became cheaper for foreign purchasers. In doing so it employs more domestic people from India and gives them a salary, increasing the general standard of living. Not only that but there will be an increase in external equilibrium. An increase in exports are also helpful because it allows the government to spend more money on important things like economic development and development of the Human Development Index. Now that India has successfully achieved the aim of lowering their trade deficit by $4 billion, we wonder what are the positives of this surprising achievement? Primarily, it is an indicator of a strong economy and if you have a strong currency it will lead to higher FDI because countries will have faith in your economy, leading to higher exports etc. as well as that, it means that the country has no need to spend its foreign reserves because the exports can pay for a part of its imports. Having lower imports/higher exports is a strong stimulant for domestic producers to work which improves the standard of living for a country. Last but not least, there comes the indication of a strong currency. The added exports of countries investing in India have in turn strengthened their currency, which is now at 61 to the dollar as opposed to the 69 it was earlier in the month. But as good as the effects are so far, it cannot be so for long. One must look to the future when thinking of economics, and as positive as the effects of lowering the imports of precious metals are, it cannot last for long. The problem with contracting the imports of various precious metals, including gold, is that gold is in high demand. It is said even in the article that this current, surprisingly happy surprise, cannot last. There are various festivals and events in the near future and the demand for gold has picked up which is estimated to increase the trade gap once again. The future of the Indian economy isnt set in stone but growth has been aimed downwards and one can only hope for a better future. And so it is easy to see that India have made a smart move when they decided to contract their imports, because it has added incentive for domestic producers to sell their goods instead of buying foreign products. Also the added exports has done the same, allowing domestic workers to receive more money and working more. This in turn has added more trust in the Indian economy for more FDI. This is all very good because it has slowly strengthened the India rupee. Unfortunately this

whole thing cannot be set in stone, for the future has yet to tell what might happen due to the rise in demand for gold because of the upcoming festivals. In short, this has been good for Indias economy. For now.

Bibliography
Epi. Trade Deficts Consequences. n.d. 29 October 2013 <http://www.epi.org/publication/tradedeficits-consequences-policy-implications/>. Globalization 101. Consequences of Trade Restrictions. n.d. 29 October 2013 <http://www.globalization101.org/consequences-of-trade-restrictions>. Investopedia. Trade Balance. n.d. 29 October 2013 <http://www.investopedia.com/university/releases/tradebalance.asp>. Seeking Galpha. Indias Gold Exports Slump. n.d. 29 October 2013 <http://seekingalpha.com/article/1561512-indias-gold-exports-slump-the-governmentsunintended-consequences>.