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The current account is the difference between a country's total exports and its total imports. It is an indicator of the trends in foreign trade. A current account deficit (CAD) indicates that the import bill is much larger than the total export.
Having a deficit in the current account is not necessarily a bad thing in the short term. But if it continues for a longer time, then it indicates that the country is becoming more and more a net debtor to the rest of the world. Not such a good position to be in.
Historically, India has been a net importer. In fact, its exports knit is largely dominated by commodities, which means the growth in exports is driven by commodity cycles. This has always kept India's trade balance under pressure i.e. resulting in a trade deficit.
Now, with the make in India's move, the government plans to make India an export hub. The growth in the Chinese economy has been on the back of healthy exports.
According to an article in Mint, exports in the month of February, increased by 17.5% YoY to $ 24.5 billion, while imports rose 21.8% YoY to $ 33.4 billion in the same month, thus leading to a trade deficit of $ 8.9 billion, the lowest in five months.
In fact, during the same period, China's exports dropped 1.3% and imports soared 38.1%. Some believe these are the early signs of revival in the exports. It is a signal of a turnaround in global demand for Indian goods.
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Let us see what led to decrease in the trade deficit and robust increase in the exports. The increase in the merchandise exports was dominated by gems and Jewellery (up 2.31%), chemicals (up 11.27%), engineering goods (up 47.33%), ready- made garments (up 5.05%) and petroleum products (up 27.57%).
This shows the growth has been largely upon the revival in the commodities. In fact, the lower base of last year has also played a part in the growth revival.
Interestingly, this has always been the case with India's Trade balance. The export component is highly dominated by commodities, which makes the export growth commodity cycle driven.
Now, if we look at the import side. Imports are also dominated by the commodities. If we look at the key items, it includes coal, petroleum, chemicals, pearls and stones, electronic goods and gold among others.
This means the import knit is also dominated by the commodities. This is why the growth in exports is generally offset by the growth in imports.
We believe, the trade deficit problem for India is here to stay. Even though improving commodity cycle may help the growth in merchandise exports, but that is to be offset by the increase in imports, mainly the crude oil and gold.
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