TRADE DEFICIT
Source: indianexpress
Why in News?
India's trade deficit widened to a record $31.02 billion in July, this is a three-time increase from the $10.63 billion trade deficit reported in July last year
Key Takeaways(Important for Prelims)
- Trade deficit or negative balance of trade (BOT) is a gap between exports and imports, when the money spent on imports increases the money spent on exports, a trade deficit occurs
- It can be calculated for different goods and services and also for international transactions, the opposite scenario to the trade deficit is called a trade surplus
- There can be multiple factors responsible,
- one of them is some goods not being produced domestically, in that case, they have to be imported which can lead to an imbalance in trade
- A weak currency can also be a cause as it makes trade expensive
- If the trade deficit increases, GDP decreases, A higher trade deficit can decrease the local currency's value
- More imports than exports, according to economists, impact the jobs market and lead to an increase in unemployment
- If more mobiles are imported and less produced locally, then there will be fewer local jobs in that sector
CURRENT ACCOUNT DEFICIT
Background
Monitoring the trade deficit is crucial because of its direct bearing on the current account deficit (CAD).
Alarmingly, foreign direct investment helps bridge the CAD has seen a moderation.
The wider the CAD, the greater the downward pressure on the rupee.
which has already weakened considerably since the conflict in eastern Europe began in February.
A weaker rupee makes imports costlier, potentially widening the trade deficit and thus triggering a vicious cycle.
Key points
- Outward shipments for the month rose 24.2 from a year earlier, with electronics and chemicals showing healthy expansion and petroleum products more than doubled.
- The trade deficit- the extent to which the import bill exceeds export receipts- is worryingly breached.
- Global crude oil prices have surged by more than 40 per cent in 2022 in the wake of Russia's war on Ukraine.
- The heatwave has bolstered power demand, resulting in a 136 per cent hike in coal imports last month.
- The Ministry of power set timelines for states to import coal over the next few months.
- The RBI has sought to steady the rupee against wild swings, evident in the dip in foreign exchange reserves.
- RBI fought against imported inflation as global commodity prices remain sharply raised.
Conclusion
- The government must consider additional incentives for exports and encourages local production of items to strain the import bill.
- The coal prices were prevented with better-advanced estimates of power demand and optimal allocation of coal-carrying wagons.
- Policymakers ill afford to guard down on trade imbalances and risk growth-retrading inflation and more pressure on the rupee.
Current Account Deficit:
- It records exports and imports in goods and services and transfer payments.
- It represents a country’s transactions with the rest of the world and, like the capital account, is a component of a country’s Balance of Payment(BOP).
- There is a deficit in the Current Account if the value of the goods and services imported exceeds the value of those exported.
The major components are:
- Goods,
- Services
- Net earnings on overseas investments and net transfer of payments over some time, such as remittances.
It is measured as a percentage of GDP.
The formulae for calculating Current Account Balance are:
Current Account Balance = Trade gap + Net current transfers + Net income abroad.
(Trade gap = Exports – Imports).
Balance of Payments (BoP)
Definition
It can be defined as a systematic statement of all economic transactions of a country with the rest of the world during a specific period usually one year.
Components of BoP
- Current account
- Capital account
- Financial Account and Errors and Omissions.
Current Account: It shows the export and import of visible and Invisibles.
Capital Account and Financial Account: It shows the capital expenditure and income of a country.
Errors and Omissions: Sometimes the balance of payment does not balance. This imbalance is shown in the BoP as errors and omissions.
