TRADE DEFICIT
1. Context
India’s trade deficit in October surged by 141% in October 2025 to $21.8 billion. While this is a seemingly alarming jump, underlying data show that things aren’t all that bad, with India’s exports displaying some resilience in the face of significant headwinds, and its imports being disproportionately affected by the import of a few items.
2. What is the Trade balance?
- Trade balance is a measure of how much a country earns from selling goods to other countries compared to how much it spends on buying goods from abroad. It tells us whether a nation is bringing in more money through exports or sending out more money due to imports.
- If a country exports more than it imports, it has a trade surplus, meaning it earns extra foreign currency and its economy may appear stronger in terms of external trade.
- On the other hand, if imports are higher than exports, the country experiences a trade deficit, which means it is spending more on foreign goods than it is earning through exports.
- The trade balance is an important part of a country’s Balance of Payments because it reflects the health of international trade, affects the value of its currency, and influences economic policies.
- In simple terms, it shows whether a country is “selling more than it buys” or “buying more than it sells” in the global market
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3. India's Exports
- India’s overall exports in October 2025 dipped by 0.7%, settling at $72.9 billion. This decline was mainly driven by a significant fall in merchandise exports, which dropped by 11.8% to $34.4 billion. In contrast, the services sector performed strongly, registering an 11.9% increase during the same month.
- However, this weak merchandise performance in October did not substantially alter the broader trend.
- When viewed across the April–October 2025 period, India’s total exports still posted a 4.8% rise. During these seven months, merchandise exports inched up by 0.6%, while services exports expanded by 9.75%.
- India achieved its highest-ever quarterly export levels in both the first and second quarters. This led to the strongest export showing in the first half of any financial year, driven largely by robust growth in services exports.
- It is also worth noting that the major challenges India currently faces—particularly the 50% tariffs imposed by the United States—impact only merchandise exports and not the services sector
4. Sectors that are affected by this trend
- In October 2025, many labour-intensive industries experienced sharp declines in their export figures.
- Shipments of leather and related goods dropped by 15.7%, gems and jewellery fell by 29.5%, exports of organic and inorganic chemicals were down by 21%, engineering goods declined by 16.7%, cotton yarn by 13.3%, man-made yarn by 11.8%, and jute by 27.8%, among others.
- Since the United States is a major buyer of most of these products, the recently imposed tariffs have dealt a heavy blow to these sectors.
- Although exporters are attempting to move into new markets and broaden their global reach, reworking supply chains is a slow process, meaning these challenges are likely to continue for some more months
5. What are the Disadvantages of Trade Deficits?
- A trade deficit can create several challenges for a country, affecting both its economy and long-term growth prospects. When a nation imports more than it exports, money flows out of the economy, and this imbalance can have a range of consequences.
- One disadvantage is the increased reliance on foreign capital. To finance a persistent trade deficit, a country may have to borrow from abroad or attract foreign investment.
- Over time, this can lead to rising external debt and greater vulnerability to global financial fluctuations. If investors lose confidence, the country may face sudden capital outflows or currency instability.
- A large trade deficit can also put downward pressure on the domestic currency. As more foreign currency is demanded to pay for imports, the value of the national currency may depreciate.
- A weaker currency makes imports costlier, contributing to inflation, which in turn can reduce purchasing power and increase the cost of living.
- Another drawback is the potential harm to domestic industries. When imports surge, local producers may struggle to compete with cheaper or higher-quality foreign goods.
- This can lead to reduced production, job losses, and even the closure of certain industries. Over time, the country might become less self-reliant, depending heavily on imported goods and services.
- Moreover, a sustained trade deficit can signal deeper structural problems—such as low productivity, limited export diversification, or a lack of competitiveness in global markets. These issues can slow economic growth and hinder future development if not addressed through policy measures
6. What Measures are Needed for a Balanced Trade?
- Achieving a balanced trade—where exports and imports remain reasonably aligned—requires a mix of policy interventions, structural reforms, and long-term economic strategies. Here is an explanatory, non–bullet-point answer:
- A balanced trade situation can be fostered by strengthening a country’s export capacity while ensuring that imports remain sustainable. One of the most important steps is improving the competitiveness of domestic industries.
- This involves investing in better infrastructure, reducing logistics costs, enhancing technology adoption, and supporting innovation so that Indian products can match or outperform global competitors. When goods become competitive in quality and price, export growth naturally strengthens.
- At the same time, diversification of export markets and products is crucial. Relying too heavily on a few countries or sectors makes trade vulnerable to external shocks such as tariffs, geopolitical tensions, or global demand fluctuations.
- By expanding into new regions and promoting high-value sectors—like pharmaceuticals, electronics, engineering goods, and services—India can reduce risk and stabilize export earnings.
- Another measure is encouraging domestic manufacturing to reduce unnecessary imports. Policies such as “Make in India,” production-linked incentives, and support for MSMEs help develop local supply chains that can replace imported goods. This not only saves foreign exchange but also boosts employment and industrial growth.
- Trade agreements also play a major role. Negotiating fair and strategic free trade agreements can open new markets for Indian exporters while ensuring that local industries are protected from excessive import competition.
- Clear, stable trade policies help build confidence among exporters and attract investment into export-oriented sectors.
- Improving ease of doing business is equally important. Simplified customs procedures, faster clearances, efficient ports, and digital trade facilitation make exporting smoother and cheaper. Reducing compliance burdens encourages more firms—especially small and medium enterprises—to participate in global trade.
- Finally, macroeconomic stability supports balanced trade. A stable currency, controlled inflation, and prudent fiscal policies make exports more predictable and imports manageable. When the domestic economy is stable, it creates an environment where trade can grow without creating imbalances
7. Way Forward
This issue can be examined from different angles. On the export front, India’s merchandise shipments are likely to remain under strain for as long as the 50% U.S. tariffs continue. Even so, the trade friction between India and the United States has begun to ease somewhat. Both countries completed the sixth round of negotiations on a Bilateral Trade Agreement (BTA) in October, signalling renewed progress.
Officials from both sides have once again started expressing optimism about finalising at least the initial phase of the BTA. Such discussions had paused right after the steep tariffs were imposed, so their revival is a positive development. If the question of tariffs is resolved in the early part of the agreement, India’s merchandise exports could regain momentum.
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For Prelims: Trade Deficit, Balance of Payments (BoP), Exports, Imports
For Mains: GS III - Economy
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Previous Year Questions
1. Consider the following countries:
1. Australia
2. Canada
3. China
4. India
5. Japan
6. USA
Which of the above are among the free-trade partners' of ASEAN? (UPSC 2018)
A. 1, 2, 4 and 5 B. 3, 4, 5 and 6 C. 1, 3, 4 and 5 D. 2, 3, 4 and 6
2. Increase in absolute and per capita real GNP do not connote a higher level of economic development, if (UPSC 2018) (a) Industrial output fails to keep pace with agricultural output.
3. The SEZ Act, 2005 which came into effect in February 2006 has certain objectives. In this context, consider the following: (2010)
Which of the above are the objectives of this Act? (a) 1 and 2 only (b) 3 only (c) 2 and 3 only (d) 1, 2 and 3 4. A “closed economy” is an economy in which (UPSC 2011) (a) the money supply is fully controlled 5. With reference to the “G20 Common Framework”, consider the following statements: (UPSC 2022)
1. It is an initiative endorsed by the G20 together with the Paris Club. 2. It is an initiative to support Low Income Countries with unsustainable debt. Which of the statements given above is/are correct? (a) 1 only (b) 2 only (c) Both 1 and 2 (d) Neither 1 nor 2 Answers: 1-C, 2-C, 3-A, 4-D, 5- C
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Source: The Hindu
