What is trade gap? Why has it widened? 


India’s imports have seen an undue growth of 10.9% to $41.95 billion in April 2013 due to a significant increase in gold imports

A trade gap occurs when a country’s imports are more than its exports. This results in an unfavourable balance of trade for the importing nation and results in it becoming a net debtor to the rest of the world. A nation’s balance of trade is favorable when its exports exceed its imports.

A worsening trade gap leads to a trade deficit. A deficit occurs when a country exports less goods, services and capital to foreigners than they import. India’s trade deficit zoomed more than 70% month-on-month to $17.8 billion in April 2013. The country’s trade deficit touched a record high of $191 billion in FY13.

India’s exports grew 1.6% in April 2013 to $24.16 billion from $23.7 billion in the same period last year, while imports have seen an undue growth of 10.9% to $41.95 billion due to a significant increase in gold imports.

Gold and silver imports in April 2013 have more than doubled to $7.5 billion from $3.1 billion YoY. Besides bullion, imports of crude oil, metals, and chemicals saw a growth of 4%, 52% and 23%, respectively.

Oil imports in April stood at $14 billion as against $13.5 billion YoY. Non-oil imports grew 14.9% to $27.86 billion during the period.

The trade gap has moderated to $10.3 billion in March after touching $20 billion in January this year. The large gap increases the importer nation’s vulnerability to financial shocks in other parts of the world. It also results in the depreciation of the local country’s currency.

A rising trade deficit is a cause for concern as it may result in foreign investors exiting their investments and transferring the same to safer havens. Thus, destabilising the local economy and currency further.

India has been trying to narrow its trade deficit. The government has made gold costlier for local consumers by increasing import taxes, a step that helped reduce consumption to an extent earlier this year. But a steep correction in prices globally saw domestic investors flocking to purchase the yellow metal. It is important to note that gold is India's second-biggest imported commodity by value after crude oil.

To stem the flow of imports, the Reserve Bank on May 13 imposed restrictions on import of the yellow metal by banks.

To moderate the demand for gold for domestic use, the central bank has decided to restrict the import of gold on consignment basis by banks, only to meet the genuine needs of exporters of gold jewellery.



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