Context

As per official data, India has recorded a trade deficit  with nine of its top 10 trading partners  in 2023-24.

India’s FY 2023-24 Trade Deficit Narrows Amid Shifts in Trade Dynamics with Major Partners

• Trade Deficit: India’s total trade deficit in FY 2023-24 narrowed down to $ 238.3 billion as against $ 264.9 billion in the previous fiscal.
  • Increase in Deficit: India saw a rise in the deficit with China ($ 85 billion), Russia ($ 57.2 billion), Korea ($ 14.71 billion) and Hong Kong ($ 12.2 billion) in FY 2023-24, compared to 2022-23
  • Reduction in deficit: The trade gap with the UAE, Saudi Arabia, Russia, Indonesia, and Iraq narrowed.
• Trade surplus: India has a trade surplus of $ 36.74 billion with the US in 2023-24. 
  • India also records a surplus with other trade partners like the UK, Belgium, Italy, France and Bangladesh.
• Largest Trading Partner: China has overtook the USA to emerge as India’s largest trading partner with $ 118.4 billion of two-way commerce in 2023-24.
  • Washington was the top trading partner of New Delhi during 2021-22 and 2022-23.
• Free trade agreement: India has a free trade agreement with four of its top trading partners ie. Singapore, the UAE, Korea and Indonesia (as part of the Asian bloc).

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What is a Trade Deficit?

• A trade deficit  also known as a negative balance of trade (BOT) occurs when a country’s imports exceed its exports.
  • The balance can be calculated on different categories of transactions ie, goods or merchandise, services, goods and services and also for international transactions ie. (current account, capital account, and financial account) 
• Cutting trade deficit requires boosting exports, reducing unnecessary imports, developing domestic industries, and managing currency and debt levels effectively,
• Advantages: 
  • Boost consumption: A trade deficit allows a country to consume more than it produces and in short run, can help nations to avoid shortages of goods and other economic problems.
  • Comparative Advantage: It provides countries with comparative Advantage as the country can be more focused on its strength and resources rather than to worry about producing everything.
• Concerns: 
  • Depreciation of currency: A rising trade deficit can cause the country’s currency to depreciate because more foreign currency is needed to cover for imports. This depreciation makes imports more expensive, worsening the deficit.
  • More borrowing: The country might need to borrow more from foreign lenders to cover the imports, increasing external debt leading to depleted foreign exchange reserves 
  • Investment sentiments: overall rising Trade deficit can signal economic instability to investors, leading to reduced foreign investment.
  • Dependency: Bilateral trade deficit becomes a major issue when a country gets overtly reliant on the other for critical supplies
    • Example: India’s dependency on China for critical rare earth minerals and Active Pharma Ingredients.