With economic recovery leading to higher imports, the trade deficit could widen
Tracking weak global demand and trade flows, merchandise exports from India declined for the 13th month in a row in December. Given global growth headwinds and volatility in commodity prices, it is unlikely to bounce back in a hurry. The best-case scenario at this stage would be that things begin to stabilize at the present level. However, a significant decline in the value of the Chinese renminbi, a real possibility, will put further pressure on exports from India.
In an environment where global demand is likely to remain weak, policymakers in India will have to deal with at least two sets of challenges.
First, the government will have to focus more on internal drivers of growth to augment economic recovery.
Second, efforts will have to be made to improve long-term export competitiveness, which will help exporters gain market share. Otherwise, with economic recovery leading to higher imports, the trade deficit could widen.