India's trade deficit: A comprehensive strategy could boost exports

The only exception is India’s trade surplus with the US; our exports to the country exceeded our imports from it by over $36.7 billion in 2023-24. India’s top three trade partners—China, the US and UAE—were in the same position in 2013-14. Given the fact that these top 10 countries together make up about 52% of India’s total trade, this data warrants attention. 

However, our scrutiny must go beyond a superficial level. To unearth what ails Indian trade and resolve persisting trade deficits, we must dig deeper. Only a comprehensive analysis of structural, policy and market factors can lead to sustainable solutions that address the problem’s root causes.

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A comprehensive assessment requires a multifaceted approach. The trade deficit story often gets oversimplified. The World Economic Forum’s Global Future Council on International Trade and Investment calls an emphasis on trade balances “a poor guide to understanding past sources and implications of trade performance." A deficit can be an effect of various causes. 

The country may be importing more raw materials to produce more goods. An increase in imports may point to increase in domestic income or cheaper foreign products, among other reasons. The former indicates increased purchasing power and the latter may point to a competitiveness issue at home. 

This is not to present trade deficits as desirable, but to show that it comes with a set of pros and cons, a major con being added pressure on a country’s currency. All in all, the causes and effects of a trade imbalance varies according to the specific circumstances of the economy. Trade deficits also persist for multiple reasons. 

For instance, a general assumption associates tariff reductions with increased exports. That is not a direct causation. Factors such as inverted duty structures and asymmetric tariff rates can hinder domestic manufacturing by incentivizing imports. 

The conversation needs to move from an overemphasis on one parameter to understanding how India can maximize gains from its trade relations and enhance its overall trade ecosystem.

Also read: India’s electronics, pharma, engineering goods exports beat global trade slowdown during FY24

We must assess our capacities to identify which products can be efficiently produced locally and traded globally. Opportunities can thus be explored with each trade partner. For example, a substantial portion of India’s exports to the US in 2023-24 were in the HS2 code category of ‘Electrical machinery and equipment and parts thereof; sound recorders and reproducers, television image and sound recorders and reproducers, and parts.’ We need in-depth trade partner-specific analysis to understand our competitive advantage.

Boosting India’s manufacturing capabilities through efficiency and productivity is also critical. In recent years, an emphasis has been evident on boosting manufacturing with the vision of making India self-reliant. Apart from initiatives like the Production-Linked Incentive scheme, the introduction of GST, measures related to the ease of doing business, a reduction in compliance burden and the National Infrastructure Pipeline, among others, have given this sector the right impetus. 

Strategic mapping of India’s manufacturing capacities at a regional level will be a crucial exercise to attain greater self-reliance. We must ponder: What is the most effective pathway to spur domestic manufacturing? How do we enable small-scale industries to produce at scale? 

Thoroughly evaluating import-export figures, mapping our competitive advantage with each trade partner and understanding how boosting manufacturing is a must to make India a global export hub are of huge significance in leveraging trade for overall economic growth.

Also read: India eyes new export markets as trade with traditional partners declines

Our focus should be on policies that make our manufacturing firms globally competitive. One key effort that lies ahead is diversifying our export basket and markets. Trade policy experts have acknowledged a welcome change in India’s export basket, which has seen a shift away from traditional commodities such as gems, jewellery and textiles towards engineering and electronic goods. 

A shift to high-value goods reflects a move up the value chain and speaks of our competitiveness. India saw its electronic goods exports increase by around 54.8% in February 2024 compared to February 2023. Additionally, India’s notable merchandise exports included engineering goods, electronic goods, chemicals, drugs and pharmaceuticals and petroleum products.

However, there is still extensive ground to cover for India to truly become a high-value commodity exporter. Targeted support, investment in R&D, skilling and infrastructure development will pave the way towards the country’s export targets.

It is important to understand that the country’s trade balance, while an important indicator, provides insights into only a part of the real scenario. India’s main priority should be to enhance domestic manufacturing by leveraging competitive advantages, move up the value chain and invest in technology and innovation. Thriving in international markets as an export powerhouse requires a comprehensive approach.