Cargo ship for exports. Representative image
Credit: Reuters Photo
New Delhi: Boost in domestic manufacturing due to PLI (production linked incentive) schemes and increase in exports on account of free trade agreements are expected to bridge the country's trade deficit further, Economic Survey said on Monday.
However, it said that fluctuations in commodity prices, especially for critical imports like oil, metals, and agricultural products, can impact India's trade balance and inflation levels.
The Survey said that though ongoing geopolitical headwinds impacted India's merchandise exports, lowering international commodity prices ensured a lower trade deficit in FY24 than in FY23.
The country's merchandise trade deficit narrowed to $240 billion in 2023-24 from $265 billion in 2022-23.
It added that changes in trade policies by major trading partners or geopolitical developments can affect India's export opportunities and market access.
"In the coming years, India's trade deficit is expected to decline further as the PLI scheme is expanded and India creates a globally competitive manufacturing base in several product categories," the Survey said.
It added that the recently signed FTAs (free trade agreements) are expected to increase the global market share of the country's exports.
The PLI scheme for sectors like mobile manufacturing, information technology (IT) hardware, pharmaceutical, telecommunications, and food product are helping to increase manufacturing and cut imports.
India has implemented FTA with Mauritius, Australia and the UAE.
It added that a narrowing merchandise trade deficit and rising service exports have improved the CAD (current account deficit), ending with a surplus of 0.6 per cent of GDP in Q4 of FY24.
However, the risks to the performance of India's external sector are on the downside due to the persistence of current geopolitical tensions and policy uncertainty, it said.
Some of the challenges listed by the survey includes fall in demand from major trading partners like the US, rise in trade cost, and volatility in commodity prices.
Attacks on shipping in the Red Sea and drought in the Panama Canal have resulted in trade flows being re-routed, increasing journey time and costs.
India's merchandise trade relies heavily on maritime trade, so disturbances in major shipping routes can impact its economy.
"It is critical to explore what these changing paradigms mean for India. Policies need to be a mix that straddles security concerns with economic considerations," the survey said, adding India's push towards manufacturing in complex and niche sectors through schemes such as PLI and Make in India aims to balance these goals.
Further, the survey emphasised on the need to focus on improving India's competitiveness in many product areas.
For example, it said, India has tremendous potential in becoming a large global exporter in agricultural commodities. Fostering stronger regional trade ties and adding more markets for Indian goods will help mitigate global demand fluctuations.
"In an era when global economic growth is likely to be buffeted by geopolitical tensions and protectionism, growing India's exports of goods and services will be a stiffer challenge than before," it cautioned.
Commenting on this, Rumki Majumdar, Economist, Deloitte India, said that despite global uncertainties, India's exports are recording positive growth rates.
"That shows the resilience of our exports amidst global uncertainties," she said, adding, "by transforming our export basket and focusing on higher margins and value addition across various sectors, India will easily achieve its ambition of USD 2 trillion in exports by 2030-31."
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