Read: https://indianexpress.com/article/opinion/editorials/surging-imports-slowing-exports-deficit-currency-8011041/

The editorial flags India’s merchandise trade deficit to a record high of $25.6 billion in June due to a surge in imports combined with tepid growth in exports. The combination of slowing global growth, which will have adverse consequences for exports, and steady demand for imports, implies that the current account deficit will likely continue to widen in the coming quarters.

While overall exports grew at just under 17 percent in June On the other hand, merchandise imports(gold, crude, and coal accounted for most ) grew by a staggering 51 percent in June, driven in part by a combination of high commodity prices and healthy domestic demand.

In the current macro-economic environment, where private consumption and investment remain lackluster, and the capacity of central and state governments to drive growth is constrained by their high debt burdens, exports could provide the much-needed fillip to growth.

However, a slowdown in global growth implies that the impetus from exports to India’s growth may moderate. A weaker currency could provide some fillip. While in the near term, it may exert pressure on the trade deficit, a weaker currency will trigger the much-needed correction in the current account.

While the government has taken a spate of measures, which include increasing the import duty on gold, levying taxes, and imposing restrictions on exports of petroleum, these are unlikely to have a significant moderating influence on the deficit, the editorial concluded.

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: Foreign Direct Investment /Foreign Institutional Investment/ Loans

                         The current account has two components – exports and imports of goods and export and imports of Invisibles (including 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 payments 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 the higher inflow of foreign direct investment. But the 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 the competitiveness of Indian exports.