Trade surplus

Subject: Economy

Context:

The RBI has released India’s balance of payments data for the fourth quarter of financial year 2020.

Findings

• India has attained a small current account surplus which is around 0.1 per cent of the GDP.
• This is largely driven by a lower trade deficit.
• This is a rare occurrence because since 1976-77, there has not been a single year when India did not incur a substantial merchandise trade deficit.
• Improvement in trade balance has been driven mainly by a sharper decline in imports. This is a warning sign for the economy as the decline in imports, especially in merchandise goods, points towards a contraction of demand in the real economy.

Reasons:

• A surplus on account of invisibles, emanating mainly out of services exports and remittances, India’s substantial trade deficit turns into a moderate current account deficit
• Reason for long term trade deficit: Lack of export dynamism in comparison with our East Asian neighbours is reason for trade deficit and also large imports of oil, gold, and electronics have chronically inflated our import bills.

Trade deficit

• Trade balance of a country shows the difference between what it earns from its exports and what it pays for its imports.
• If it is in negative that is, the total value of goods imported by a country is more than the total value of goods exported by that country, then it is referred to as a “trade deficit”.

Current Account deficit

• A current account deficit is a trade measurement that says a country imported more goods, services, and capital than it exported.
• It encompasses the trade deficit plus capital like net income and transfer payments.
• Current Account = Trade gap + Net current transfers + Net income abroad