With reference to the international trade of India at present, which of the following statements is/are correct? 1. India's merchandise exports are less than its merchandise imports. 2. India's imports of iron and steel, chemicals, fertilisers and machinery have decreased in recent years. 3. India's exports of services are more than its imports of services. 4. India suffers from an overall trade/current account deficit. Select the correct answer using the code given below:
Contents12
- A1 and 2 only
- B2 and 4 only
- C3 only
- D1, 3 and 4 only
Show answer
Answer: (D) 1, 3 and 4 only
Statement 1 (Merchandise exports < imports) — CORRECT:
India consistently has a merchandise trade deficit.
In April-August 2019-20, India exported $133 billion worth of goods but imported $210 billion — a clear deficit of about $77 billion.
Statement 2 (Imports of iron, steel, chemicals decreased) — NOT CORRECT:
The share of imports of iron and steel, organic chemicals, and industrial machinery actually INCREASED (not decreased) between 2011-12 and 2018-19.
Statement 3 (India has net surplus in services trade) — CORRECT:
India is a net services exporter.
In April-August 2019-20, India's service exports were $67 billion while service imports were $39 billion — a surplus of about $28 billion.
This is mainly due to India's strong IT and software services exports.
Statement 4 (Current Account Deficit was below 5% of GDP in 2018-19) — CORRECT:
India's CAD was 2.1% of GDP in 2018-19 and 1.5% of GDP in H1 of 2019-20 — well below 5%.
Answer: D (1, 3 and 4 only).
Key Takeaway:
India = merchandise deficit (imports > exports) + services surplus (IT/software) + overall current account deficit (but moderate).
The services surplus partially offsets the merchandise deficit.
India consistently runs a merchandise trade deficit (imports exceed exports) but maintains a services trade surplus, primarily from IT and software exports.
The 2020 exam occurred during a period when India's current account deficit had moderated to around 2% of GDP, making balance of payments a relevant policy discussion topic.
UPSC is testing whether students can distinguish between different components of the balance of payments - merchandise trade, services trade, and overall current account position.
India's Merchandise Trade Deficit
Indian Economy merchandise exports merchandise imports trade deficit
India's Merchandise Trade Deficit: Structure & Trends
India consistently runs a merchandise trade deficit — imports exceed exports
Major imports: crude oil, gold, machinery, chemicals drive the deficit
In 2019-20 (Apr-Aug): exports $133 billion, imports $210 billion, deficit $77 billion
India's merchandise trade deficit means the country imports more goods than it exports. This structural deficit has persisted for decades, driven by India's dependence on energy imports and capital goods for industrial growth.
India's Trade Balance Components
Component | Status | Key Drivers | Recent Trend |
|---|---|---|---|
Merchandise Trade | Deficit | Crude oil, gold, machinery imports | Deficit continues |
Services Trade | Surplus | IT services, software exports | Surplus maintained |
Overall Current Account | Deficit | Merchandise deficit > Services surplus | Moderate deficit |
Major Import Categories
Crude oil & petroleum products — largest import item, drives energy security concerns
Gold & precious metals — significant import burden, affects CAD during high demand periods
Machinery & equipment — essential for industrial development but increases import dependence
Chemicals & fertilizers — industrial inputs and agricultural requirements
Trap: Statement 2 falsely claims imports of steel, chemicals decreased — they actually increased
Don't confuse merchandise deficit with overall current account — services surplus partially offsets goods deficit
India's trade deficit doesn't mean economic weakness — reflects growth-driven import demand
India's Services Trade Surplus
Indian Economy exports of services imports of services services trade
India's Services Trade Surplus: IT Services Dominance
India has a services trade surplus — exports exceed imports consistently
IT & software services are the primary driver of India's services surplus
2019-20 (Apr-Aug): service exports $67 billion, imports $39 billion, surplus $28 billion
India's services trade surplus is a major strength in its external sector. The country has emerged as a global hub for IT services, business process outsourcing, and software development, creating a substantial export advantage.
India's Key Service Exports vs Imports
Service Category | Export Strength | Import Dependence | Net Position |
|---|---|---|---|
IT & Software Services | Very High | Low | Large Surplus |
Business Process Outsourcing | High | Low | Surplus |
Financial Services | Moderate | Moderate | Balanced |
Travel & Tourism | Moderate | High | Deficit |
Transportation | Low | High | Deficit |
Services Surplus Drivers
IT services exports — India's global competitiveness in software development and maintenance
English proficiency — enables service delivery to US, UK, and other English-speaking markets
Cost advantage — skilled labor at competitive rates compared to developed countries
Time zone benefits — allows 24/7 service delivery when combined with global delivery centers
Statement 3 is correct — India does export more services than it imports
Don't assume all trade categories show deficit — services is India's strength area
Services surplus partially offsets merchandise deficit but doesn't eliminate overall CAD
India's Current Account Deficit
Indian Economy current account deficit overall trade
India's Current Account Deficit: Components & Sustainability
India runs a current account deficit (CAD) — total outflows exceed inflows
CAD was 2.1% of GDP in 2018-19 and 1.5% of GDP in H1 2019-20
CAD above 3% of GDP is considered unsustainable by economists
India's Current Account Deficit reflects the net result of all international transactions. While India has a merchandise deficit, its services surplus and remittance inflows help keep the overall deficit at manageable levels.
Current Account Components
%%{init: {"flowchart": {"wrappingWidth": 460}}}%%
flowchart TD
s1["`**Merchandise Trade**
**Deficit** of ~$77 billion (imports > exports)`"]
s2["`**Services Trade**
**Surplus** of ~$28 billion (IT services strength)`"]
s3["`**Primary Income**
**Deficit** (investment income outflows)`"]
s4["`**Secondary Income**
**Surplus** (remittances from diaspora)`"]
s5["`**Net Current Account**
**Moderate deficit** (1.5-2.1% of GDP)`"]
s1 --> s2
s2 --> s3
s3 --> s4
s4 --> s5CAD Sustainability Factors
Financing through FDI & FPI — capital account surplus offsets current account deficit
Forex reserves — adequate reserves provide buffer against external shocks
Remittance inflows — diaspora remittances help reduce overall deficit
Services competitiveness — IT services surplus provides structural support
Statement 4 is correct — India does suffer from current account deficit
Don't confuse trade deficit with current account deficit — CAD includes services, remittances, and investment income
CAD of 1.5-2.1% is moderate, not crisis-level (crisis threshold ~3-4% of GDP)
Balance of Payments Structure
Indian Economy
Balance of Payments: Current vs Capital Account
Balance of Payments = Current Account + Capital Account + Errors & Omissions
Current Account = Trade Balance + Services + Primary Income + Secondary Income
Capital Account = FDI + FPI + External Borrowings + Other Capital Flows
The Balance of Payments is a comprehensive record of all international transactions. It follows double-entry accounting where total credits must equal total debits when accounting errors are included.
BoP Components
# Balance of Payments
## Current Account
- Merchandise Trade
- Services Trade
- Primary Income
- Secondary Income
## Capital Account
- FDI
- FPI
- External Commercial Borrowing
- NRI Deposits
## Reserve Changes
- Foreign Exchange Reserves
- SDR Holdings
- Gold ReservesCurrent vs Capital Account
Account Type | What It Measures | Key Components | India's Position |
|---|---|---|---|
Current Account | Flow of goods, services, income | Trade, services, remittances | Deficit (1.5-2.1% GDP) |
Capital Account | Flow of investments & capital | FDI, FPI, loans | Surplus (offsets CAD) |
Overall BoP | Net change in reserves | Current + Capital accounts | Usually surplus |
Don't confuse trade balance (goods only) with current account (goods + services + income)
CAD doesn't mean BoP crisis — if capital account surplus > CAD, overall BoP is positive
Primary income = investment returns, Secondary income = transfers like remittances