Trade Deficit

Notes

A trade deficit occurs when a country's imports of goods exceed its exports of goods (merchandise trade deficit). When goods and services are combined, it is the overall trade deficit.

India's position (approximate): merchandise exports of about US$430-440 billion and imports of about US$700 billion in 2024-25, giving a trade deficit of about US$280 billion. Services exports (about US$380 billion) give a large surplus that narrows the combined deficit.

Causes

Crude oil: India imports more than 85% of its oil, about a quarter or more of its import bill. Gold and silver, electronics, coal, fertilisers, edible oils and capital goods are other big imports.
China is the largest source of the bilateral deficit.
Slowdowns in major markets, trade barriers (such as US tariffs), a strong rupee and high input costs.

Implications: a bigger current account deficit (CAD), pressure on the rupee and reserves, and external vulnerability. A deficit can also reflect capital goods imports that raise future growth.

Measures

Export promotion: Foreign Trade Policy 2023-28 (target of US$2 trillion exports by 2030); RoDTEP and RoSCTL (refund of embedded taxes), PLI schemes, SEZs, export credit, Districts as Export Hubs, and the Advance Authorisation scheme.
Import substitution: Atmanirbhar Bharat, import curbs on defence items, tariffs, and Make in India.
Reduce oil and gold imports: ethanol blending, electric vehicles, green hydrogen, strategic petroleum reserves, the Sovereign Gold Bond and gold monetisation.
Free trade agreements: India-UAE CEPA (2022), India-Australia ECTA (2022), India-EFTA TEPA (2024), and the India-UK CETA (signed 2025).

Key Points

Trade deficit: imports of goods exceed exports.
Main import drivers: crude oil, gold, electronics, coal.
Services surplus and remittances narrow the CAD.
Measures: export promotion, import substitution, reducing oil and gold imports, FTAs.
Foreign Trade Policy 2023-28 targets US$2 trillion exports by 2030.

MCQs

Q1. A trade deficit means: (a) Exports exceed imports (b) Imports of goods exceed exports of goods (c) Capital outflows exceed inflows (d) Fiscal deficit is high Ans: (b).

Q2. The largest item in India's import bill is: (a) Gold (b) Crude oil and petroleum products (c) Electronics (d) Coal Ans: (b).