Balance Of Trade: Indian Economy

Balance of Trade: Indian Economy


The most significant element of a country's balance of payments (BOP) is the balance of trade (BOT), which is the difference between exports and imports for a specific time period. A country experiences a trade deficit when it imports more goods and services than it exports in value, whereas a country experiences a trade surplus when it sells more goods and services than it imports. India's balance of trade between 1957 and 2021 was -2.97 USD billion on average, reaching a high of 0.79 USD billion in June 2020 and a low of -22.91 USD billion in November 2021. 

What Is A Trade Balance?

•    A balance of payments is a group of accounts that shows how a nation has conducted commerce with other nations over time. These accounts show every financial transaction that took place during that time, including purchases of goods, services, and income.
•    The balance of trade, or the difference between a country's import and export values during a specific period of time, is the key factor that determines a country's balance of payments.
•    The word "trade" refers to the buying and selling of goods. However, it is referred to as imports and exports when it is done on a worldwide scale.
•    The imports and exports of an economy over the course of a year are referred to as the balance of trade (BOT).
•    BOT only records items that are clearly visible.
•    When a nation imports more products and services than it exports in value, a trade deficit results.
•    When a nation exports more products and services than it imports, there is a trade surplus.
•    India's balance of trade between 1957 and 2021 was -2.97 USD billion on average, reaching a high of 0.79 USD billion in June 2020 and a low of -22.91 USD billion in November 2021.
Balance of Trade: Indian Economy

Importance Of The Trade Balance

•    BOT shows the varying imports and exports of a nation through time.
•    Trade equilibrium occurs when an economy achieves parity in terms of imports and exports.
•    But if the former is greater than the latter, a trade deficit is produced, which is bad for a nation.
•    An economy is in a stronger position when the value of exports exceeds the value of imports, creating a trade surplus.
•    The balance of trade for a nation is included in the current account

Difference Between Balance Of Trade And Current Account



Balance of Trade (BOT)

Current Account


Includes only visible items.

Includes both visible and invisible items.


Narrow Concept. It is only a part of the current account

Wider Concept. It includes BOT.


Trade Surplus

•    An economic indicator of a favorable trade balance in which a nation's exports exceed its imports is called a trade surplus.
•    Total Value of Exports minus Total Value of Imports is the trade balance.
•    We have a trade surplus if the result of the above computation is positive.
•    A trade surplus is the net inflow of local currency from foreign markets.


•    A trade surplus can boost an economy's employment and economic growth, but it can also raise prices and interest rates.
•    The value of a nation's currency on the international markets can also be impacted by its trade balance because it enables that nation to trade away the majority of its money.
•    The strength of a country's currency in relation to other currencies is sometimes aided by a trade surplus, which affects currency exchange rates. However, this depends on the amount of products and services produced in a country relative to other countries as well as other market conditions.
•    When focusing just on trade effects, a trade surplus shows that there is a high level of demand for a nation's products abroad, which drives up the cost of those products and strengthens the domestic currency.

Trade Deficit

•    When a nation imports more products and services than it exports in value, a trade deficit results.
•    Total Value of Exports minus Total Value of Imports is the trade balance.
•    We have a trade deficit if the result of the above computation is negative.
•    A trade deficit is the net outflow of domestic currency from international markets.
•    In November 2021, India's trade deficit reached a record high of -22.91 USD billion.

A trade deficit might occur for one of two reasons:

•    The demand cannot be satisfied by domestic production.
•    For instance, because the native supply of edible oils, crude oil, and pulses is insufficient to fulfil demand, we must import these items.
•    Because consumers prefer foreign items, home manufacture is expensive.
•    Although we have a considerable amount of steel manufacturing capability, our production costs are higher than those in China, therefore Indian consumers, like automobile industries, are buying Chinese steel at a lower price for the same quality.


•    The most obvious advantage of a trade imbalance is that it enables a nation to consume more than it produces.
•    In the near term, trade imbalances can assist nations in avoiding product shortages and other economic issues.
•    A trade imbalance devalues a nation's currency under a system of floating exchange rates.
•    When the domestic currency is less expensive in a nation with a trade imbalance, import prices rise. As a result, people buy less imported goods and switch to locally produced alternatives.
•    As the nation's currency weakens, exports become less expensive and more competitive in foreign markets.
Balance of Trade: Indian Economy


•    Trade deficits can eventually lead to serious problems.
•    The most serious and obvious problem is the possibility of economic invasion brought on by trade deficits. When a nation's trade deficits continue, residents of other nations are given money to invest there. Foreign investors will own almost all of the nation's assets if this trend persists.
•    Trade deficits are far more damaging when there are fixed exchange rates. Under a fixed exchange rate regime, currency devaluation is impossible, trade imbalances are more likely to persist, and unemployment may increase significantly.
•    The twin deficits hypothesis states that there is a connection between trade deficits and budget deficits. Budget deficits have a history of preceding trade deficits.

How To Cut The Trade Deficit

•    Cut back on consumption and raise your savings: If families or the government reduce consumption (businesses save more than they spend), imports will decline and less borrowing from abroad will be needed to pay for consumption.
•    Taxes on consumption: Like in virtually every other nation, consumption taxes could aid in reducing the deficit by discouraging consumption, promoting saving, and lowering the government's deficit.
•    Depreciating the value of a currency: The trigger for changes in the trade imbalance is typically a significant real exchange rate depreciation. The trade balance is improved by a weaker rupee, which increases the cost of imports while lowers the cost of exports.
•    Assessing capital inflow taxes: By lowering excessive consumption borrowing, a tax on capital inflows (non-foreign direct investment) that increases proportionally to the magnitude of the inflow could aid in closing the budget deficit. 


If the administration is serious about reducing the trade imbalance, it has choices at its disposal. However, before changing the trade policy, the government ought to pause. Higher tariffs on one nation or product shift trade to another nation or product, distorting consumption while maintaining a nearly balanced trade balance. This is because import duties reduce the demand for foreign currency, which pushes up the value of the currency. Due to this reduction in imports and exports, tariffs skew consumption and output. While having little impact on the trade imbalance, higher tariffs are expected to reduce commerce and income.

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