The Balance of trade deficit

Since 1957 India has been recording sustained trade deficits. According to recent reports by the Ministry of Commerce and Industry, India recorded a trade deficit of 9219.90 USD Million in November of 2013.

The GDP (Y) of any country is the sum of four components which include Consumption (C), Investment (I), Government Purchases (G) and Net Exports (NX= Exports- Imports). As net exports form one of the four components of the GDP, If it is positive (trade surplus), the nation’s GDP increases while if it is negative(trade deficit), GDP decreases. As GDP reflects a country’s  economic well being all nations want their GDP to be higher rather than lower, so all nations want their balance of trade to be positive.

A trade deficit represents an outflow of domestic currency to foreign markets. This means that large amounts of the Indian currency are being held by foreign nations, which they may decide to sell at any time. A large increase in Rupee sales can drive the value of the currency down, making it more costly to purchase imports.

Trade deficit is considered harmful as an increase in the imports over the exports destroys jobs in the domestic. Another danger lurking with trade deficit is its impact on the stock markets as a prolonged trade deficit could have adverse effects on investment.

One of the major reasons why a country suffers a trade deficit is because it cannot produce as much as is required hence to overcome trade deficits the most logical solution would be to increase the total exports. To achieve this, a variety of methods could be adopted. The first is to increase the productivity of the goods being produced in India which would enable it to increase the quantity of exports. The government had earlier this year also announced several export boosting measures like extension of its interest subvention scheme to boost textile and engineering exports. Another step could be to start exporting new goods and promote the production of indigenous goods. India is the land of cultures and traditions and is popular all over the world for this. Indigenous goods from various parts of the country such as exotic Indian textiles like saris and suits, organic and traditional foods, ayurvedic and homemade cosmetics and medicines should be promoted. And finally India could start exporting to new countries. There are 196 countries in the world. International expansion to new countries is a very important step boost exports and to curb trade deficit.

Click here for government certifications