Widening trade deficit weighs on INR

By Advisorymandi
20-April-2018 12:54:04 PM
Widening trade deficit weighs on INR

Trade balance is economic measure of import and export of goods and services with other countries of the world. Countries can run trade deficit or trade surplus. Trade surplus, simply depicts higher export than import, where as the trade deficit points towards weak export and country relying on imports for its domestic demand.

Trade balance is a part of balance of payment, thus any plus minus in this does effect the financial health the economy. India since long is bearing the burden of trade deficit amid undying love for yellow metal coupled with Indian companies not fairly equipped to meet the demand of the second most populous country of the world.

Trade deficit does play its role on valuation of the currency as well. As valuation of the currency not only depends on the economy of the country but also the demand and supply also pave the path of the currency.

Despite such adverse effect, trade deficit, to some extent is supportive and is require for growth of any economy initially. Trade deficit means economy is allowing wide varieties of goods and services from other countries to cross the border and come inside the Indian Territory. This fact makes domestic good and services provider competitive, who has too raise the quality of product at a competitive prices to sustain themselves in the market which is flooded with high end international brands providing their goods and services in the market. Thus, public get access to high quality product at reasonable prices, thus increasing the standard of living.

Trade deficit is like a junk food, which is tasty at first, but if you continue to include junk in your diet, your health will certainly deteriorate in near future. In same way, Prolonged trade deficits is not healthy for any economy. When trade deficit continues to soar, it has adverse effect over small companies, as they fail to compete with bigger high end and losses out on business, which in turn increases unemployment, as people losses their job.

INR also face lashes against other foreign currency. In 2017-18, India trade deficit of $157 billion has been widest since 2012-13. Alone in March, trade deficit has hit high of $13.69 billion climbing from $11.98 billion in February. The major reason behind this trade deficit number was soaring imports more than rise in export. Further rising petroleum prices also pushed the import prices.

So as the import rose this year , this has lead to higher demand for foreign currency , so the importer has to sell INR to buy foreign currency mainly USD, the globally accepted foreign currency. As the demand for currency goes down, INR falls weak and green bucks strengthen. So importer has to shed more INR to buy a single unit of foreign currency.

Thus higher deficit does make INR week. As ministry released its trade deficit number, INR weakened to the level of Rs 65.15 from the previous day’s low of 65.185. And then it further continued to weakened and is currently at the level Rs 66.038, level last seen on March 2017. And it has also been observed during closing of the financial year, INR do fall weak as the importers has to clear their payments.

So to make Indian economy stronger, Government must forward with new policies and programs like “MAKE IN INDIA” to make Indian industries strong and competitive enough to face multinational corporations. And we must work forward to be net exporter eliminate the fact of being net exporter.


Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.

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Author: Advisorymandi

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