India’s Trade deficit
The massive trade deficit that India has been running over the years is an indication of not just rapid economic growth but also weak industrial competitiveness
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India had a trade deficit of $137 billion for the fiscal year ended March 2015. It then narrowed to $118 billion in the following year. The commerce ministry reported last week that the gap for the fiscal year that ended two weeks ago was $105 billion. This means two things.
First, the Indian trade gap has shrunk by a cumulative $32 billion over the past two fiscal years. Second, this is the first time in several decades that the country’s trade deficit has contracted for two years in a row.
This is not the beginning of the usual mercantilist argument that a narrower trade gap is necessarily better, but there is no doubt that the massive merchandise trade deficit that India has been running over the years is an indication of not just rapid economic growth but also weak industrial competitiveness. That the trade gap has narrowed despite a stronger rupee makes the trend even more intriguing.
Most economists quite naturally focus on what is happening to the current account deficit. But some attention also needs to be paid to the narrowing trade deficit.