Negative impact of Positive Balance of Trade

Historically, the Balance of Trade for India has been negative averaging -2752.60 USD, Million, from 1957 to 2020. Now trade deficit per se is neither good nor bad, it means that a company is importing more than it is exporting. Continuous efforts have been made by the government to lessen this deficit, and there are several reasons for that:

A) With greater imports, the country needs more foreign currency to make purchases. For this purpose, the domestic currency is sold and foreign currency is acquired, which leads to depreciation of the country’s currency reducing its purchasing power.

B) Imports lead to money leaving out of the country, whereas exports lead to inward movement of the money. This inflow of money with its multiplier effect leads to increased growth of the country, and that is why exports are preferred to imports.

So, when the trade deficit went positive in June 2020, it was a moment of joy for the country and something to boast about for the government. The fact that was played down, was that this trade surplus was achieved on the back of decreased imports owing to reduced spending by country nationals due to Covid-19 lockdown, subsequent job losses, and uncertainty about the future.

Now this situation of greater exports than imports should have made everyone happy in the country, but it didn’t. Instead, it brought about new problems for the exporters within the country. You must be wondering, why was it a problem for the exporters if there were more exports than imports. The answer is a situation that arose out of it: ‘Container Imbalance’. Due to this ’Container Imbalance’, the price of shipping containers went up for the Indian exporter.

So, what is ‘Container Imbalance’ and how did it impact the Indian exporters? In this scenario of trade surplus, India wanted to export more and more goods but they were finding it hard to get the containers for shipping at a normal price. Why? Because the imports had dwindled when compared to previous levels. When a container leaser leases a container for shipping exports, he expects that the container will also be used to import some goods back to the country. If that happens everything is fine and everyone is happy, but what if it doesn’t happen. When exports are vastly more than imports, we have a bunch of containers lying in one place and a deficiency of containers in another, a situation of ‘Container Imbalance’. The leaser has to get the empty container back and it will lead to additional charges for him. In this case, the leaser will pass on these additional costs to the lessee. That was how the situation for Indian exporters was as their costs of availing a container increased tremendously, more than doubling for the US and Africa with a backlog of almost 3-weeks.

Why did this situation come about?

Source: The Hindu

With the implementation of lockdown after 24th march, the imports and exports fell sharply. As we can see from the graph, the deficit has gone down because imports have fallen sharper than the exports; exports being 12.41% less in June than what they were last year, compared to imports being 47.5% less in June than what they were last year. Recovery started in April, and it was slack for the imports when compared to exports, as can be seen from the steep slope of the exports post-April. In the month of June, imports fell again due to tepid demand in the domestic market while exports continued to increase, which resulted in the trade surplus for the country. Compared to the figures in June 2019, the most notable decline in exports was in gems and jewellary (-50%), leather (-40.5%), petroleum products (-31.65%), readymade garments(-34.84 %) and cashews(-27%), whereas for imports, the decline was most notable in gold (-77.42%), coal (-55.72%), petroleum, crude and products (-55.29%) and electronic goods (-34.05%). Meanwhile, exports rose for certain products such as oil seeds (50.48%), coffee (2.58%), tobacco (3.56%), rice (32.72%), pharma (9.89%), and spices(22.92%) leading to trade surplus. It can be inferred that luxury goods’ demand (export and import) paled after initial lockdown due to uncertainty in market and low consumer confidence. The demand for essentials and food items (export) regained pre-pandemic levels and even saw growth compared to the previous year around june. As we can see, the imports were still down 47.5% from the level of June 2019, we can say that the demand picked up in international markets but in India, the demand still has a long way to go to achieve pre-pandemic levels.

This mismatch between high exports and low imports bought about the situation of ‘Container Imbalance’ and caused trouble for Indian Exporters. Thankfully the situation didn’t persist and once again the imports have exceeded the exports and we now have a trade deficit of $2.7 billion. This can be attributed to the picking up of industrial activity after the extended lockdown and subsequent uncertainty, increasing consumer confidence as well as festival season. With time, this deficit is expected to grow more as the situation normalizes and, imports and exports regain their previous levels. This situation of trade surplus is an exception and has happened after 18 years in Indian history and we don’t foresee such a situation arising again in the near future unless more severe second and subsequent waves of Covid-19 cases hit India.

By Antriksh Vijavat
Class of ’22 | Indian Institute Of Management Tiruchirappalli

References :

1. India Balance of Trade (2020), Balance of Trade
2. The Hindu (2020), Why India’s Trade Surplus in June is not a good sign ,The Hindu: BoT
3. Finshots (2020), When Shipping Containers Dissapear, Container Imbalance
4. Financial Express (2020), Export, imports fall for 4th month in June, but trade turns surplus after 18 years, https://www.financialexpress.com/economy/export-imports-fall-for-4th-month-in-june-but-trade-turns-surplus-after-18-years/2025355/
5. Ministry of Commerce & Industry (2020), India’s Foreign Trade: June 2020, https://pib.gov.in/PressReleasePage.aspx?PRID=1638804