Why India’s trade balance impacts investors


Dec. 3 2014, Updated 12:00 p.m. ET

What’s trade balance?

In today’s globalized world, most nations are trading with each other. As a result, it’s important to look at a country’s trade balances. Trade balances account for a significant portion of a country’s current account. Like other “balance” indicators, trade can either be in surplus when exports are more than imports or in deficit when the situation is reversed.

Although surplus and deficit situations have pros and cons depending on the state of a nation’s business cycle, usually a continuous or increasing deficit situation is a concern.

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India’s share in world exports

According to an economic survey in 2013–2014, India’s share in the world’s exports and imports was 1.7% and 2.5%, respectively, in 2013. Although this is an increase from 0.7% and 0.8% of world exports and imports in 2000, the increase has been very gradual. India’s rank among the top exporters in the world increased from 31st in 2000 to 19th in 2013. Among importers, India was ranked 26th in 2000. It was ranked 12th in 2013.

Why India has a trade deficit

India has a trade deficit mainly because of high import growth. Crude oil accounts for most of the imports at ~40%. More vehicle purchases also increased the demand for fuel. As a result, India’s imports continued to grow.

Also, with crude oil accounting for the majority of imports, India has been susceptible to changes in oil prices. Exports haven’t kept pace with the increasing imports. The global economic slowdown affected India’s major export destinations. Exports’ value continued to fall.

Currently, India has a business-friendly prime minister—Narendra Modi. India’s businesses are expected to get a boost. Businesses ranging from software service companies—like Infosys (INFY)—to financial institutions—like ICICI Bank (IBN) and HDFC Bank (HDB)—will benefit.

Exchange-traded funds (or ETFs)—like the WisdomTree India Earnings Fund (EPI) and the PowerShares India Portfolio (PIN)—will also benefit.

In the next part of this series, we’ll discuss India’s main exports and imports. We’ll also analyze its top trading partners.


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