Monday, September 16, 2013

Widening Trade Deficit

India’s trade deficit has been widening rapidly and has become a major cause of concern for the policy-makers. The reason behind widening trade deficit is simple – the rate of growth of imports is higher than that of exports.
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Why has India’s import growth rate been fast?
a) Development needs of the economy – This has led to large imports of capital goods to sustain our process of development.

b) Rise in Global Prices of crude oil – Some of our imports like crude oil are required to meet the energy needs of the economy. Due to lack of alternative sources of energy, India has to import large amounts of crude oil. As global prices rise, our import bill also increases.

c) Growing Consumption needs – In India, consumerism has been on the rise in recent years. To meet the consumption needs, India has to import the consumer goods which it fails to produce domestically.

Raising domestic production of capital and consumer goods and searching for new alternatives for energy hold promise for slowing down the growth rate of India’s imports.

Why has India’s export growth rate been slow?
a) Poor Infrastructure – This raises the cost of manufacturing and when high-cost manufactured goods are exported in the global market, they become uncompetitive.

b) Growing Domestic needs of the economy – Our increasing domestic requirements consume a large fraction of what is produced and leaves lesser for exports.

c) Global Slowdown – Due to the slowdown in the US and EU countries, our exports to these regions have stagnated. A revival in these regions would revive demand which would be beneficial for our exports.

Improving infrastructure, raising domestic production and revival of growth in western countries will give an impetus to India’s exports and help in narrowing India’s trade deficit.

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