When you go to market to buy a toothpaste then which will be the favorable condition for you?
Condition 1: You have fewer ‘made in india’ choices like Vicco, Dant Kanti, Babool, promise, neem etc.
Condition 2: You have many options like Colgate, Dant Kanti, Sensodyne, Close-Up, Pepsodent, Promise, Babool, Vedashakti etc.
Of course option 2, why? because you have plenty of options and may be they are best according to your budget. In condition 1 you only have fewer choices irrespective to your interest and budget.
So, to take care of your need, Government import those toothpastes from abroad.
Just like toothpastes, there are hundreds of goods government import just to fulfill your needs as you are wealthy enough to buy them all.
Let’s come of Trade Deficit now,
A Trade deficit typically occurs when domestic production cannot meet demand, imports from other nations increase.
A Trade deficit typically occurs when a country does not produce enough goods for its residents. Alternatively, a deficit means that a country’s consumers are wealthy enough to purchase more goods than the country produces. When production cannot meet demand, imports from other nations increase.
India’s trade deficit in June 2018 widened the most in five years on the back of a surge in crude oil imports.
The trade deficit stood 28% higher over a year ago period at $16.6 billion, according to data released by the Ministry of Commerce. That was led by a 56.6% surge in imports of petroleum products, the data showed. India imports about two-third of its oil needs.
Have you ever encountered what India actually imports and exports majorly?
India’s Major Imports:
Gold imports declined 2.8 percent year-on-year to $2.3 billion.
Oil imports increased 56.6 percent to $12.7 billion from last year.
Import of pearls, precious and semi-precious stones fell 17.1 percent to $2.7 billion.
Coal, coke and briquette imports rose 26.9 percent to $2.2 billion.
Imports of machinery, both electrical and non-electrical, rose 32.8 percent to $3.2 billion.
India’s Major Exports:
Petroleum products’ exports grew 52.5 percent to $4.1 billion.
Exports of organic and inorganic chemicals advanced 30.3 percent to $1.7 billion.
Engineering goods’ exports grew 14.2 percent to $6.7 billion.
Drugs and pharmaceuticals’ exports grew 14.7 percent to $1.5 billion.
Exports of readymade garments fell 12.3 percent to $1.3 billion.
Gems and jewellery exports’ increased 2.7 percent to $3.5 billion.
So when Import increase significantly than exports then country has Trade Deficit.
Raises living standard of residents:
You have wider range of varieties and goods, you can choose them all according to your needs and your budget. Some wealthy individuals wear branded cloths and shoes in less price which ultimately rises the living standards of the Individuals.
Reduces the Inflation:
When you continue to buy Colgate instead of Dant kanti then what Patanjali will do? The company will lower the rates, provide discounts and offers that ultimately lowers the inflation and higher consumer spending.
High Purchasing power:
One person’s spending is other person’s income so when you will spend more, others will earn more. If others will earn more they will have better purchasing power and economy will become more stable.
Domestic companies will start to Bust:
You are preffering imported goods over domestic ones so ultimately less people will use domestic products so, Less domestic production > Less revenue > Less EBITDA > less bottom line.
Fewer domestic jobs:
The country from where the goods are being imported will have more productions and more jobs meanwhile the country which is importing goods will have fewer jobs because of less production and demand. Manufacturing companies are usually hit the hardest when a country imports more than it exports, and the result is fewer jobs or lower incomes for employees because of the competition from imports. Fewer jobs mean that fewer goods are produced in the economy which, in turn, could lead to even more imports and a greater deficit.
So, is Trade Deficit really bad for the country? Well, Not always!
Having a trade deficit might also inspire India to take positive action that would ultimately eliminate the deficit while benefitting the country.
For example: India could encourage the research and development companies to reduce its dependency on imported item by inventing new technologies and implement them all to make domestic products more efficient and cost effective.
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[Author is SEBI Registered Research Analyst.]