globalEDGE Blog: India's Trade Deficit Continues to Climb

India's Trade Deficit Continues to Climb

India’s trade gap, especially as of late, is increasing rapidly.  This is due largely in part to substantial percentage hikes in imports and stagnant export growth.  Some are growing concerned over the rising account deficit, which is directly correlated to the current trade deficit.  To put India’s trade deficit in perspective, exports grew by 0.8% in January while imports grew by 6.1%.

Domestic and international issues are equally important in determining the amount of goods a country will be able to export.  In India’s case, industrial production is not operating at maximum potential because of high borrowing costs and policy impediments.  From an international perspective, economic woes and uncertainties in Europe and the United States have limited India’s export opportunities.  Anand Sharma, India’s Federal Trade Minister stated that “there has been an overall contraction in global trade [and that] the euro-zone crisis has had a negative impact.”  He believes that these two issues deserve most of the blame for the widening trade gap, but is confident that exports will start to improve, causing the trade gap to decrease.

India’s government, in the past few months, has begun to exercise strategies to narrow the trade gap.  Gold is India’s second-largest imported commodity and has thus been a major contributor to the trade deficit.  To lower the demand for gold, the government is increasing the import tax by 2%.  The government has also extended a program that offers cheap loans to exporters and has opened up access to this program to engineering-goods firms.

India cannot control the ups and downs of the global economy, but can make it easier for domestic firms to export goods and services.  India’s 2012 ranking for ease of doing business was 132 out of 183, which means that the regulatory environment is not conducive to starting or maintaining a business.  In order to improve export levels, India must make regulatory improvements and create incentives for firms that export.

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