India’s merchandise trade deficit expanded to its highest-ever mark of $24.29 billion in May, driven by a surge in gold imports, adding to the already-high energy import bill amid the Russia-Ukraine war. The trade deficit widened to $24.69 billion in May from $20.11 billion in April. Official data showed that surging commodity prices kept merchandise imports above $60 billion for the third month in a row.

LEARNING FROM HOME/ WITHOUT CLASSES/ BASICS

A trade deficit is an economic measure of international trade in which a country’s imports exceed its exports. A trade deficit represents an outflow of domestic currency to foreign markets. It is also referred to as a negative balance of trade (BOT).

Trade Deficit = Total Value of Imports – Total Value of Exports

               Nations of the world record their trades in their balance of payment (BOP) ledgers. BOP of India is a systematic statement of all economic transactions between the residents of India and the residents of the rest of the world in an accounting period (say one year).

                     One of the primary accounts in the balance of payments is the current account, which keeps track of the goods and services leaving (exports) and entering (imports) a country; traded with the rest of the world.  The excess of imports of goods and services over their export is referred as Current Account Deficit (CAD).

        The BoP as a classification format, classifies the BoP account into two:

• Current account transactions that involves exports and imports of goods and services (services are incorporated under invisibles). And
• Capital account transactions that involve the flow of investable money to and from India. Ex: FDI/FII Loans

                         Current account has two components – exports and imports of goods and export and imports of invisibles (include services, remittances and income). Hence the current account has two sub components:

 a.)  Merchandise trade account: gives the money value of India’s exports and imports of goods.

   b.) Invisible account: indicate India’s

(1) Service exports and imports (software exports, tourism revenues, etc, various service imports)

(2) Remittances (private remittances from abroad and payment to foreign countries)

(3) Income (income earned by MNCs from their investment in India).

ANATOMY OF CAD

A higher CAD is not necessarily bad if the bulk of it is on account of such imports that help exports and growth and is financed through higher inflow of foreign direct investment. But slowing economy and a growing CAD make a lethal combination. While the former would tend to discourage foreign capital inflows, the latter would have a cascading impact on inflation and competitiveness of Indian exports.