International Trade — Practice

Question 1

Distinguish between balance of trade and balance of payments. What is India's current situation?

Accepted Answer

BALANCE OF TRADE (BOT): The difference between the value of a country's MERCHANDISE EXPORTS (goods) and MERCHANDISE IMPORTS (goods) over a given period. FORMULA: BOT = Value of Exports (goods) − Value of Imports (goods). FAVOURABLE (SURPLUS): Exports > Imports (e.g., China, Germany). UNFAVOURABLE (DEFICIT): Imports > Exports. BALANCE OF PAYMENTS (BOP): A broader account that includes ALL international economic transactions — not just trade in goods. BOP includes: (1) Current Account: Trade in goods + trade in services + investment income + remittances. (2) Capital Account: Foreign investment (FDI, FII) + loans + banking transactions. The BOP must balance in accounting terms (deficit in current account is financed by surplus in capital account, or by drawing down foreign exchange reserves). INDIA'S SITUATION (FY2023): Balance of Trade: DEFICIT of ~$265 billion (imports $720 billion − exports $455 billion). Major import: crude oil (~25% of total). Major export: petroleum products, gems, engineering goods. Balance of Payments/Current Account: Current Account DEFICIT (CAD) because merchandise trade deficit is only partially offset by: services surplus (~$170 billion, mainly IT exports) + remittances (~$125 billion). India finances its CAD through foreign investment inflows and remittances.

Question 2

Describe the composition of India's exports and imports. What does this reveal about India's economic structure?

Accepted Answer

INDIA'S EXPORT COMPOSITION (FY2023, ~$450 billion merchandise + ~$340 billion services): MERCHANDISE EXPORTS: Engineering goods (~25%): machinery, transport equipment, iron and steel products. Petroleum products (~15%): India refines imported crude oil and re-exports refined products (major refineries: Reliance Jamnagar — world's largest refinery complex). Gems and jewellery (~10%): India cuts and polishes ~90% of the world's diamonds. Textiles and garments (~8%): cotton yarn, fabrics, readymade garments. Chemicals and pharmaceuticals (~8%): India is the 'pharmacy of the world' — largest generic drug exporter globally. Agricultural products (~7%): rice (India is world's largest rice exporter), spices, marine products. SERVICES EXPORTS (~$340 billion): IT/software development: ~$245 billion (world's largest IT services exporter). Business process outsourcing, financial services, consulting. INDIA'S IMPORT COMPOSITION (FY2023, ~$720 billion): Crude oil and petroleum (~25%): India imports ~85% of its crude oil needs — primarily from Russia, Iraq, Saudi Arabia, UAE. Gold (~8%): India is world's 2nd largest gold consumer (jewellery + investment). Electronics (~10%): smartphones, components, semiconductors — mostly from China. Machinery (~10%): capital goods for industry. Coal (~7%): for power plants. WHAT IT REVEALS: STRENGTHS: IT services exports → India has a world-class knowledge economy. Generic pharmaceuticals → strong domestic manufacturing capability. Diamond processing → specialised craft skills. WEAKNESSES: Heavy crude oil import dependence (~85%) → energy security vulnerability. Heavy electronics import from China → inadequate domestic manufacturing for high-tech goods. India imports petroleum products after being an oil importer — but this is because India has large refinery capacity but insufficient domestic crude production.

Question 3

India runs a large trade deficit with China. Analyse the causes, consequences, and India's policy responses.

Accepted Answer

INDIA-CHINA TRADE DEFICIT: India's merchandise trade deficit with China was approximately $83 billion in FY2023 (India imported ~$98 billion from China; exported ~$15 billion). This is India's single largest bilateral trade deficit. CAUSES OF THE DEFICIT: (1) ELECTRONICS AND COMPONENTS: China manufactures ~70% of the world's electronics. India imports: smartphones (Apple iPhones assembled in China/India but containing Chinese components, Samsung phones), laptops, televisions, telecom equipment. China's manufacturing ecosystem (skills, scale, supply chains) built over 30 years is extremely difficult to compete with. (2) ACTIVE PHARMACEUTICAL INGREDIENTS (APIs): India's pharmaceutical industry — despite being the world's largest generic drug exporter — imports ~70% of its APIs (the chemically active ingredients in medicines) from China. This is a strategic vulnerability: if China restricts API exports (as it briefly threatened during COVID-19), India's $20 billion pharma export industry would be compromised. (3) SOLAR EQUIPMENT: India imports ~85% of its solar panels from China (cheapest producer). India's renewable energy targets (500 GW by 2030) therefore strengthen the very trade deficit India wants to reduce. (4) INDUSTRIAL CHEMICALS AND MACHINERY: China's exports of chemical intermediates, fertiliser inputs, and machinery are priced below what India can produce domestically. CONSEQUENCES: (1) CURRENT ACCOUNT PRESSURE: The China deficit adds to India's overall trade deficit, putting downward pressure on the rupee and requiring foreign exchange reserves to finance. (2) DEINDUSTRIALISATION RISK: Cheap Chinese goods have undercut some Indian manufacturers — in sectors like toys, electronics, low-end textiles — preventing India from developing domestic manufacturing capacity. (3) STRATEGIC VULNERABILITY: In sectors like APIs and telecom equipment (5G), Chinese supply dominance creates security risks. (4) EMPLOYMENT: Indian manufacturing jobs that might exist are not created because the sector is not competitive with Chinese imports. INDIA'S POLICY RESPONSES: (1) ATMANIRBHAR BHARAT ('Self-Reliant India') — umbrella initiative launched 2020 to reduce import dependence. (2) PLI SCHEMES (Production Linked Incentives): Financial incentives for domestic manufacturing in 14 sectors: smartphones (Apple's Foxconn, Samsung factories in India), APIs, solar panels, steel, chemicals, textiles. Goal: reduce import dependence by creating domestic supply. Results: smartphone production in India tripled to $10 billion (FY2023). (3) IMPORT DUTIES: India raised tariffs on Chinese goods — electronics, solar cells, steel — to create price space for domestic producers. (4) BAN/REVIEW OF CHINESE APPS: Post-2020 Galwan Valley clash, India banned 200+ Chinese apps (TikTok, WeChat, Alibaba apps) — geopolitics driving trade policy. (5) SUPPLY CHAIN DIVERSIFICATION: Attracting investment from Taiwan (TSMC supplier ecosystem), Japan, South Korea, and USA to reduce Chinese dominance in electronics supply chains. ASSESSMENT: The $83 billion deficit with China reflects structural economic asymmetries that cannot be reversed quickly — China has 30+ years of manufacturing investment advantage. PLI and Atmanirbhar policies are showing early results but require 10–15 years to significantly reduce the deficit.

Practice — International Trade

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