Model Answer
0 min readIntroduction
India’s foreign trade has undergone significant transformations in the last decade, driven by globalization, economic reforms, and evolving geopolitical landscapes. Foreign trade, encompassing both merchandise and services, is a crucial engine for economic growth, contributing to GDP, employment, and technological advancement. The current account balance, a key indicator of a country’s external financial position, reflects the net flow of goods, services, income, and financial assets. Since 2014, India has witnessed fluctuations in both its trade performance and current account balance, influenced by factors like global commodity prices, exchange rate movements, and domestic economic policies. This note will analyze these broad trends, providing a detailed overview of India’s external sector performance.
Merchandise Trade Trends (2014-2024)
Initially, the period between 2014 and 2019 saw moderate growth in merchandise exports. India’s exports were largely dominated by petroleum products, gems and jewellery, pharmaceuticals, and engineering goods. However, the trade deficit remained a persistent concern, largely due to high imports of crude oil, gold, and electronic goods. The global economic slowdown in 2019 and the onset of the COVID-19 pandemic in 2020 significantly disrupted trade flows. Exports contracted sharply, and imports also declined due to reduced domestic demand.
Post-pandemic (2021-2023), India witnessed a strong rebound in merchandise exports, fueled by global demand recovery and supply chain diversification. Exports reached a record high of over $450 billion in FY23. However, this growth was accompanied by a surge in imports, driven by rising commodity prices (especially oil and gas due to the Russia-Ukraine war) and increased domestic demand. This led to a widening of the trade deficit. In FY24 (till November 2023), export growth has moderated due to global headwinds, while import growth has remained relatively subdued.
Key Export Destinations: The United States, United Arab Emirates, Netherlands, and China have consistently been major destinations for Indian exports. Key Import Sources: China, Saudi Arabia, United Arab Emirates, and Iraq are the primary sources of India’s imports.
Service Trade Trends (2014-2024)
India has consistently been a net exporter of services. The services sector, particularly IT services, business process outsourcing (BPO), and tourism, has been a major contributor to India’s foreign exchange earnings. The growth in service exports has been relatively stable compared to merchandise exports, even during the pandemic. Digital services have emerged as a significant growth driver in recent years. However, imports of services, including transportation and insurance, have also increased.
Current Account Balance (2014-2024)
India’s current account balance has exhibited considerable volatility over the past decade.
| Year | Current Account Balance (% of GDP) |
|---|---|
| 2014-15 | -1.3% |
| 2015-16 | -0.8% |
| 2016-17 | -1.1% |
| 2017-18 | -1.5% |
| 2018-19 | -2.1% |
| 2019-20 | -0.9% |
| 2020-21 | -0.7% |
| 2021-22 | -1.2% |
| 2022-23 | -2.0% |
(Source: Reserve Bank of India, as of knowledge cutoff in early 2024)
The current account deficit widened in FY23, primarily due to a substantial increase in the trade deficit and a decline in net investment income. However, robust remittances from Indian workers abroad have partially offset the deficit. The RBI has actively intervened in the foreign exchange market to manage exchange rate volatility and maintain financial stability. Factors influencing the current account balance include global oil prices, exchange rate movements, domestic demand, and capital flows.
Impact of Geopolitical Events
The Russia-Ukraine war had a significant impact on India’s foreign trade and current account balance. Rising oil and gas prices increased the import bill, widening the trade deficit. Disruptions in global supply chains also affected trade flows. India’s decision to continue importing oil from Russia, despite Western sanctions, provided some relief in terms of energy security but also attracted scrutiny from some countries.
Government Initiatives
The Indian government has implemented several initiatives to promote exports and reduce the trade deficit, including the ‘Make in India’ program, the ‘Export Promotion Council’ schemes, and the ‘Remittance Scheme’. These initiatives aim to boost domestic manufacturing, enhance export competitiveness, and attract foreign investment.
Conclusion
Over the last decade, India’s foreign trade has demonstrated resilience and growth, albeit with periods of volatility. While merchandise trade has been subject to global economic fluctuations and geopolitical events, the services sector has remained a consistent performer. The current account balance has remained largely in deficit, necessitating careful management of exchange rates and capital flows. Going forward, India needs to focus on diversifying its export basket, enhancing export competitiveness, and promoting domestic manufacturing to achieve sustainable trade growth and maintain external financial stability. Strengthening global trade relationships and actively participating in regional trade agreements will also be crucial.
Answer Length
This is a comprehensive model answer for learning purposes and may exceed the word limit. In the exam, always adhere to the prescribed word count.