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8/7/2019 IFM_Trade Deficit
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TRADE DEFICIT & CONTROLMEASURES : INDIA AND
OTHER COUNTRIES
By : Ashley Thomas Mathew 2009072
Shweta Shankar 2009112
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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
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India
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India·s Trade Balance 1995-2010
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Measures Adopted by India to
Manage Trade Deficit
FDI
Devaluation of the Rupee
EXIM
policies Foreign trade agreements
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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
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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.
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EXIM Policy
Export Promotion measures
Import facilitation for export production
Export Incentives
Cash subsidies
Fiscal Incentives
Import Control regime
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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.
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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
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Other Countries
1. United States Of America
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USA Trade Balance 1995-2010
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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.
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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
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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
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Other Countries
2. Vietnam
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Vietnam Trade Balance 2000-2008
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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).
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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
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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
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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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