India’s goods trade deficit fell
Context
India’s goods trade deficit fell to a 42-month low of $14.05 billion in February 2025, driven by a decline in gold, silver, and crude oil imports, as per data from the Commerce and Industries Ministry.
Relevance:
GS-03 (Economy)
Key Highlights
- Trade Deficit: Fell to $14.05 billion in February 2025 from $22.9 billion in January 2025 and $19.5 billion in February 2024.
- Gold and Silver Imports: Dropped to $2.7 billion, the lowest since June 2024 ($2.5 billion).
- Crude and Petroleum Imports: Stood at $11.89 billion, the lowest since July 2023 ($11.81 billion).
- Exports: Goods exports stood at $36.9 billion in February 2025, reflecting a 10.84% YoY decline.
- Imports: Fell to a 22-month low of $50.9 billion, down 16.3% YoY.
- Reason for Decline
- Leap Year Effect: A portion of the YoY decline in merchandise exports is attributed to the base year effect due to the leap month.
- Current Account Surplus: The trade deficit reduction could lead to a current account surplus of around $5 billion in Q4 of FY25 (~0.5% of GDP).
Implications of Declining Trade Deficit
Positive Implications
- Lower Current Account Deficit (CAD): The reduced trade deficit could lead to a current account surplus of around $5 billion in Q4 FY25 (~0.5% of GDP), strengthening India’s external balance.
- Reduced Pressure on Rupee: Lower trade deficit eases pressure on the Indian rupee, reducing the need for foreign exchange interventions by the Reserve Bank of India (RBI).
- Lower Inflationary Pressure: Decline in crude oil and commodity imports reduces import costs, which could help in controlling domestic inflation.
- Boost to Foreign Exchange Reserves: Improved trade balance supports higher foreign exchange reserves, enhancing India’s ability to manage external shocks.
Negative Implications
- Slowing Export Growth: A 10.84% decline in exports indicates weaker global demand and competitiveness, which could impact job creation and industrial output.
- Weak Domestic Demand: The decline in imports, particularly in gold, silver, and crude, signals subdued domestic consumption and lower industrial activity.
- Dependence on External Factors: Recovery of exports and imports will depend on global economic conditions and geopolitical stability, which remain uncertain.
Strategic Concerns:
- Need to Diversify Export Basket: Over-reliance on a few export sectors could make India’s trade vulnerable to global disruptions.
- Boost Domestic Manufacturing: Lower imports provide an opportunity to strengthen domestic production under the Make in India initiative.
- Trade Policy Adjustments: India may need to renegotiate trade agreements and improve supply chain resilience to support export recovery.
Prelims Question:
Which of the following factors can lead to a reduction in a country’s trade deficit?
- Decrease in imports of commodities like gold, silver, and crude oil.
- Increase in export of goods and services.
- Depreciation of the domestic currency.
- Reduction in foreign direct investment (FDI).
Select the correct answer using the codes below:
(a) 1 and 2 only
(b) 1, 2, and 3 only
(c) 2 and 4 only
(d) 1, 2, 3, and 4
Correct Answer: (b) 1, 2, and 3 only
Explanation:
- Decrease in imports – Reducing imports of high-value commodities like gold, silver, and crude oil directly lowers the trade deficit.
- Increase in exports – Higher exports increase foreign exchange inflows, reducing the trade deficit.
- Depreciation of domestic currency – A weaker domestic currency makes exports more competitive and imports more expensive, helping reduce the trade deficit.
- Reduction in FDI – FDI impacts capital accounts, not the trade deficit directly.
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