ifm_trade deficit

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TRADE DEFICIT & CONTROLMEASURES : INDIA AND

OTHER COUNTRIES

By : Ashley Thomas Mathew 2009072

Shweta Shankar 2009112



What is Trade Deficit??

An economic measure of a negative balance of trade

in which a country's imports exceeds its exports. A

trade deficit represents an outflow of domestic

currency to foreign markets.

NX = Exports-Imports



India



India·s Trade Balance 1995-2010



Measures Adopted by India to

Manage Trade Deficit

FDI

Devaluation of the Rupee

EXIM

policies Foreign trade agreements



FDI

´India will have to attract more foreign investment to meet its

growing trade deficit: $30-billion trade deficit would be

sustainable only if there was corresponding increase in

remittances, invisibles and service exportsµ

- Chidambaram (2005)

Exports + Foreign Investment = Imports

Imports - Exports = Trade Deficit = Foreign Investment



Currency Devaluation

Inflates Export earnings

C

urren

cy devaluation w

ould also lead to Expansion in exports as Indian goods will become

cheaper in international market

Imports would decline as price of imported goods

would increase.



EXIM Policy

Export Promotion measures

Import facilitation for export production

Export Incentives

Cash subsidies

Fiscal Incentives

Import Control regime



Foreign Trade Agreements

India has signed free trade agreements with the

following nations:

± Afghanistan

± Bhutan

± Bangladesh

± Chile ± Korea

± Maldives ± Myanmar

± Nepal

± Pakistan

± Srilanka

± SAFTA

± MERCOSUR

In addition to this India has also entered into a

Foreign Trade Agreement with Singapore for

enha

nced eco

nomic cooperatio

n.



India·s Trade Deficit : Over the Years..

Year Import

(Cr.)

Export

(Cr.)

Trade Bal.(Cr.) Reasons for Trade Deficit and

Measures to control it

1948-51 650 647 -3 Excess of Import due to-

Pent-up demand of war.

Shortage of food & raw material due to

partition.

Import of capital goods due to starting

of hydro-electric & other projects.

1951-56 730 622 -108 Trade deficit was largely due to

programmes of industrialization which

gathered momentum and pushed up the

imports of capital goods.

No improvement in exports.



Year Import(Cr.)

Export(Cr.)

Trade Bal.(Cr.) Reasons for Trade Deficit and Measuresto control it

1956-61 1080 613 -467 Excess of import due to setting of steel

plants,heavy expansion & renovation on

railways & modernization of many

industries.

1961-66 1224 747 -477 Excess of import due to-

Rapid industrialization needs capital

goods as raw

material.Defence needs had increased due to

aggression by China & Pakistan.

Need of foodgrains due to failure of

crops in 1965-66.



Year Import

(Cr.)

Export

(Cr.)

Trade Bal.(Cr.) Reasons for Trade Deficit and Measures

to control it

1966-69 5775 3708 -2067 Devaluation was resorted to essentially-

To reduce volume of import.

To boost export.

Create favourable balance of trade andbalance of payment.

1969-74 1972 1810 -162 As a consequence of import restriction

policies with vigorous export promotion

measures ,during 1972-73 the country had

favorable balance of trade for first timesince independence.

But several international factors pushed

up the price of petroleum product, steel,

fertilizers etc that resulted low

magnitude of trade balance.



Year Import

(Cr.)

Export

(Cr.)

Trade Bal.(Cr.) Reasons for Trade Deficit and Measures

to control it

1974-79 5540 4730 -810 Significant increase in export during

every year of this period.

Export of coffee, tea, cotton fabrics etc.

recorded substantial increase in this

period.

But, Government followed policy of

haphazard import liberalization results

decline trade balance from 1977-78.

1980-85 14,986 9051 -5935 Decline in POL imports was compensated

by a more than big hike in non-POL

imports as a consequence of import

liberalization.

Consequently, huge trade balance.



Year Import

(Cr.)

Export

(Cr.)

Trade

Bal.(Cr.)

1985-90 28,874 18,033 -10,841 Huge trade imbalance compelled the

government to approach the World

Bank/IMF for loan.

1990-92 45,522 38,300 -7222 In 1990-91,push was given to export,

but as a consequence of Gulf war

government failed to curb imports.

In1991-92, government introduced

number of measures in trade policy like

abolishing cash compensatory

support(CCS) schemes and also a two-

step devaluation of the rupee, but fail to

boost up export.



Year Import

(Cr.)

Export

(Cr.)

Trade

Bal.(Cr.)

1992-01 140740 118252 -22,488 In 1992-01,slow down in exports due to-

Depressed nature of world markets.

Saturation of developed countries market

for electronic goods which are dynamic

export sectors.

Increased protectionism by industrialized

countries in area of textile and clothing.

Increasing competition from China &

Taiwan.

India underestimated the impact South-

East Asian crisis

Non-Tarrif barriers have been createdby developed counties to slow down

Indian exports.

In 2000-01 export was largely due to

rupee depreciation along with further trade

liberalization, more openness to foreign

investment in EOU sectors like IT.



Year Import

(Cr.)

Export

(Cr.)

Trade

Bal.(Cr.)

2002 ±03 65422 52512 -12910 Rise in imports in 2002-03 was broadly based on oil imports, food &allied

products(edible oil),capital goods.

2003-04 80177 64723 -15454 Exim policy 2003-04 gave massive

thrust to exports by

Duty free import facility for servicesector upto earning 10lakh foreign

exchange.

Liberalization of Duty Exemption

scheme.

Besides, all these measures trade

balance in 2003-04 are high due to

mainly on imports of POL products

more. Currently, almost two-third of

country crude oil requirements are

imported. Besides import of POL,

import of non POL items shot up by

17% in2002-03 to 26.2%in 2003-04.



Year Import

(Cr.)

Export

(Cr.)

Trade

Bal.(Cr.) Reasons for Trade Deficit and

Measures to control it

2004-05 111517.4 83535.9 -27981.5 1. Rise in FDI have helped compensatefor the trade deficit.

2. Foreign Trade Policy of 2009-14

whose main aim is to arrest and

reverse declining trend of exports

through a mix of measures including

fiscal incentives, institutional changes,

procedural rationalisation and effortsfor enhance market access across the

world and diversification of export

markets

2005-06 149165.7 103090.5 -46075.2

2006-07 185735.2 126414.1 -59321.2

2007-08 251439.2 162904.2 -88535.0

2008-09 303696.3 185295.0 -118401.3

2009-10 286822.8 178662.2 -108160.6



Other Countries

1. United States Of America



USA Trade Balance 1995-2010



Factors Contributing to Trade Deficit:

1. Petroleum Imports

In 2009, the U.S. imported over $253 billion in petroleum-relatedproducts while only exporting $49 billion.

This oil-related deficit was over half of the total 2009 trade deficit of

$380.7 billion.

2. Consumer Products and Autos

Consumer products, such as Drugs, Consumer Electronics, Clothing,

Household Goods, an

d Furn

iture. In 2009, the U.S. ran a $103 billion deficit, importing $253 billion

while only exporting $150 billion.

Automotive is another category where the U.S. ran a trade deficit in 2009. It imported $160 billion worth of cars, trucks and auto parts,while only exporting $81 billion, running a deficit of $79 billion.



Measures Take by US to counter Trade

Deficit 1. NAFTA or North American Free Trade Agreement:

Covers Canada, the U.S. and Mexico making it the world's largest freetrade area. As of January 1, 2008, all tariffs between the threecountries were eliminated. Between 1993-2007, trade tripled from$297 billion to $1 trillion

2. CAFTA-DR or Central American-Dominican Republic FreeTrade Agreement

Signed by the U.S. and six countries: Costa Rica, Dominican Republic,Guatemala, Honduras, Nicaragua and El Salvador.

It eliminated tariffs on more than 80% of U.S. exports. By 2008, these exports grew to $26.3 billion.

It opened U.S. trade restrictions for Central American sugar, textilesand apparel imports

Total trade between the U.S. and CAFTA signatories was $45.6 Billion

in 2008



3. ASEAN /APEC Initiative

The Initiative seeks to establish bilateral trade agreements

U.S. trade with ASEAN countries grew to $182 billion and with

the APEC

economies totaled to $2.4 trillio

nin

2008

4. Dollar Depreciation

The dollar decline increases the existing export earnings.

I

t also makesU

.S

. compan

ies more competitive, an

d in

creasesvolume of exports.

However it has also led to higher oil prices in the summer,since oil is priced in dollars. Whenever the dollar declines, oilproducing countries may raise the price of oil to maintain profit

margins i

ntheir local curre

ncy



Other Countries

2. Vietnam



Vietnam Trade Balance 2000-2008



Factors contributing to Trade deficit

Domestic businesses have to import machinery, materials whichcurrently accounts for 93 % of the country·s total importturnover.

Businesses have spent US$2.73 billion to import cotton and other

materials for textiles and garments and footwear Meanwhile, US$4 billion has been spent on machinery and equipment

and US$1.5 billion on plastic and plastic products, bringing the importvalue of these three groups to US$8 billion, accounting for one thirdof the country·s imports.

Prices of imported products on the rise Vietnam·s import surplus from China is increasing in value and

accounts for the majority of Vietnam·s total trade deficit (73.7percent in 2007, 69.8 percent in 2008, 97.1 percent in 2009and an estimated at 94.9 percent in 2010).



Measures to control the trade deficit

Devaluation : Vietnam trade deficit in the first seven months of 2010

widened to $7.44 billion, nearly doubling the gap in thesame period last year

Vietnam's central bank devalue the dong reference rate by2 percent to 18,932 dong to the dollar from Wednesday.

The downward adjustment was aimed at helping the countrycontrol its trade deficit

Prior to this devaluation, Vietnam had already devalued

the dong four times in the past two years The country is looking to develop support industries to

encourage domestic production instead of importing



Measures to control the trade deficit

Entered into a 5 year bilateral trade agreement with

China to boost exports from Vietnam into China.

Foreign Direct Investment



References

www.tradingeconomics.com

www.rbi.org

http://useconomy.about.com/od/tradepolicy

http://www.investopedia.com/terms/t/trade_deficit.asp

http://talk.onevietnam.org/trade-deficit-in-vietnam-good-or-bad/

http://www.thehindubusinessline.com/2005/06/09/stories/2005060900550800.htm

http://www.exim-policy.com/

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