Balance of Trade

The balance of trade is the net difference between the value of exports and imports, if value of exports is more than value of import then it is known as trade surplus (foreign exchange increasing) and if value of import is more than value of exports then it is known as trade deficit (foreign exchange decreasing).Balance of trade also known as commercial balance and net export.

                       

Balance of trade = Value of exports – Value of imports

India balance of trade

Balance of Trade in India is reported by the Ministry of Commerce and Industry, India monthly.  India Balance of trade from October 2014 to September 2015. 

We can see that the trade deficit in India decreased to USD 10.48 billion in September of 2015 compared to a USD 13.35 billion a year earlier. Also the lowest in four months. So now question arises why trade deficit decrease? For that we have study value of exports and value of imports for the same period.

Value of exports and imports:

(From October 2014 to September 2015)

As we can see that Exports in India shrank 24.42 percent year-on-year to USD 21.84 billion, it’s not a good sign when country’s exports shrank from last 9 months we are exporting below USD 24 billion in which lowest is USD 21.26 billion in august 2015. Exports globally are shrinking as growth in China is contracting and this is a worrying sign as we are almost exporting $6.4 billion to china every year.Imports in India fell 25.1 percent year-on-year to USD 32.3 billion in September of 2015,from the last 10 months we imports less than USD 36 billion, lowest in Feb 2015 USD 28.39 billion. Our imports decrease mainly because of following reasons:

1. Due to decrease in gold price (-45.62%)

2. Due to decrease in oil price and purchase (-54.53%)

So we can interpret that imports and exports both decreasing due to subdued economic scenario but as imports decreasing in more pace that is why our trade deficit also decreasing which is good sign for our country.

Now let’s compare trade deficit with 2 major economic indicators:

1. Indian currency (USDINR) :

Trade deficits, however, can lead to significant domestic debt. Over the long term, a trade deficit can result in a devaluation of the local currency as foreign debt increases. This increase in debt will reduce the credibility of the local currency, which will decrease the demand of it and thereby the value. We can see from above graph as trade deficit decreases value of currency increases and vice versa, and consistent trade deficit leads to high decrease in value of currency. That is why Indian currency decrease its value from around USD 61.5 to USD 65.8 in this year because of consistent trade deficit.

2. GDP growth rate:

Yes there is relationship between GDP growth rate and Balance of trade but not directly as GDP growth rate directly related with exports and as exports increases balance of trade also increase (if imports remain unchanged) that is what we can say that there is relationship between growth rate and balance of trade but it is more associated with exports.

Impact on economy:

• In layman terms more imports then exports known as trade deficit. High trade deficit is worry for country but if country has low trade deficit consistently then we can say that country taking full advantage of the opportunity to purchase other countries ‘product. Every country should take full advantage of goods other nations produce at more cheaply and efficient way, because if we produce in our country then it will cost us more also quality will not be as good as compare to foreign goods. So trade deficit has also some positive effects.
• Trade surpluses are generally desirable, but if the trade surplus is too high, a country may not be taking full advantage of the opportunity to purchase other countries’ products. That is, in a global economy, nations specialize in manufacturing specific products while taking advantage of the goods other nations produce at a cheaper, more efficient rate.
• So to understand balance of trade we should also look and consider break up of exports and imports country wise and product wise. Break up of imports and exports in percentage gives us perfect picture of exports and imports through which we can also comment about balance of trade.
  

  
  
• India majorly imports from china, UAE, Saudi Arabia, US etc. we can say that these countries majorly produced petroleum crude, Gold & silver, electronic goods, pearls and precious stone etc. So we can break India’s import into country wise and product wise to see from where we got which product and in how much quantity, which helps us to understand if we want to decrease our imports then we should produce these products in our country or decrease it’s consumption to reduce imports through which we can get solution of the problem of trade deficit.
• India majorly exports their products to US, UAE, Singapore, China, Hong Kong etc. We majorly exports Petroleum products, Gems & jewelry, pharma products, transport equipment etc. to these countries. We also exports to Saudi Arabiya , Netherland , Germany ,Brazil  but in very less percentage so to increase our exports we should target these countries and increase production according to their needs. We can decrease trade deficit by these approach and turn it into trade surplus in near future if we work on this approach consistently with proper monetary and fiscal policy. 

References:

• http://www.forbes.com/sites/kenrapoza/2015/01/16/oil-saves-indias-trade-balance-as-deficit-shrinks/
• https://data.gov.in/catalog/exports-imports-and-trade-balance
• http://ieconomics.com/india-balance-of-trade
• http://www.thehindu.com/data/what-do-indias-latest-export-and-import-figures-tell-us/article7326453.ece
• https://en.wikipedia.org/wiki/Balance_of_trade
• http://www.dnaindia.com/money/report-indian-exports-continue-to-worry-down-for-6th-straight-month-2096004

About the Author

This report has been prepared by Nishit Adeshara published by Aakash Raval, who are pursuing MBA from Institute of Management, Nirma University located in Ahmedabad, India.

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