This article is part of the UPSC Daily Editorial Analysis, covering The Hindu editorial – High base effect: On a shrinking trade deficit, rising exports," published on 19th March, by the best UPSC coaching in Kolkata.
Syllabus: UPSC GS-III (Indian Economy): Trade deficit, export-import trends, U.S. tariffs and diversification of trade partners.
India’s trade in February 2024 saw its biggest decline in two years. Exports fell by 10.9% to $36.91 billion. Imports also dropped by 16.3% to $50.96 billion. This has resulted in a trade deficit of $14 billion. This is the lowest trade deficit in last three years. A lower trade deficit is usually a good sign. But in this case, the drop is in exports as well as imports. So, there is a reason to worry.
One reason behind the drop is the high base effect. In February 2023, which was a leap year, India’s exports were $41.4 billion and imports were $60.92 billion. Since these numbers were high the drop in 2024 looks even steeper.
One more reason behind the decline in trade is the fear of new U.S. tariffs. Former U.S. President Donald Trump announced in February 2024 that new tariffs (extra taxes on goods) would be applied from April 2, 2024. After this American buyers stopped placing new orders and this ultimately affected India’s exports.
After this, when Trump met Indian Prime Minister Narendra Modi, they talked about increasing bilateral trade to $500 billion by 2030 and finalizing a Bilateral Trade Agreement (BTA). However, despite Commerce Minister Piyush Goyal discussing the issue with U.S. Commerce Secretary Howard Lutnick, there was no clear solution—only an agreement to continue talks on the BTA.
The U.S. is India’s second-largest trading partner and had a total trade of $118.3 billion last year. It is also the only major country with which India has a trade surplus (exports are more than imports). If India loses its trade advantage with the U.S. it could face serious economic problems.
Gold imports fell by 62% compared to February last year. This was mainly due to domestic gold prices rising to ₹87,886 per 10 grams which reduced overall demand of gold. Since fewer people were buying gold, imports also decreased.
Oil imports also dropped by 30%. This happened because India is now buying oil from different countries, due to new U.S. sanctions on Russian oil producers in January 2024.
Since mid-2023, Russia supplied over 40% of India’s crude oil imports, a big increase from less than 1% before the Ukraine war in 2022. But due to strict U.S. rules on Russian oil, India is now reducing oil purchases from Russia, leading to lower imports.
If the U.S. takes steps to reduce its trade deficit with India then India’s overall trade deficit could increase by 15%, based on last year’s $241 billion shortfall. This would hurt Indian industries that depend on the U.S. market.
To avoid too much dependence on the U.S., India needs to find new trade partners. Two possible countries are China and the U.K.
India’s trade in recent times shows serious challenges for exports as well as imports. The drop in exports is mainly due to U.S. tariffs and global trade tensions. And the fall in imports is caused by high gold prices and oil supply changes.
To reduce risks, India must diversify its trade partnerships. The FTA with the U.K. and better trade policies with China can help reduce the impact of U.S. trade actions. India must act fast to strengthen its economy and protect its trade interests.
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PRACTICE QUESTION Q.How do global trade policies impact India’s trade balance? Suggest measures to mitigate these challenges. (250 words) |
1. Why did India's trade decline in February 2024?
India’s trade declined due to a high base effect from February 2023, fears of new U.S. tariffs, a drop in gold and oil imports and global trade uncertainties.
2. How have U.S. trade policies impacted India's exports?
The announcement of new U.S. tariffs from April 2024 led to a slowdown in new orders from American buyers, affecting India’s exports.
3. Why did India's gold and oil imports decline sharply?
Gold imports fell due to high domestic gold prices, while oil imports dropped due to U.S. sanctions on Russian oil, forcing India to diversify its suppliers.
4. What risks does India face if its trade deficit grows?
A rising trade deficit, especially with a decline in U.S. trade, could hurt Indian industries, increase economic vulnerability and impact foreign exchange reserves.
5. How can India mitigate the impact of declining trade with the U.S.?
India can diversify trade partnerships, finalize the India-U.K. Free Trade Agreement (FTA) and reduce dependency on Chinese imports to balance its trade deficit.
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