Unfavourable balance of trade

Also called: Trade deficit, Negative balance of trade · Topic: International Trade: Patterns, Ports and the WTO · NCERT: Class 12, Ch 8 "International Trade"

Meaning

An unfavourable balance of trade (also called a trade deficit or negative balance of trade) is when the value of the goods a country imports (buys from abroad) is more than the value of the goods it exports (sells abroad). In short, the country spends more on goods than it earns from them.

It matters because, if this goes on year after year, the country must pay the gap from its savings of foreign money or by borrowing. Over time its financial reserves run down (NCERT).

Explanation

What is counted

• Balance of trade = value of exports − value of imports.

• The result is negative when imports are larger than exports. That is an unfavourable balance.

• Strictly, balance of trade counts goods only. Goods are called merchandise, or "visible" trade.

• Services (transport, travel, IT, finance) are "invisible" trade.
• They are not part of the balance of trade.

• They are counted in the current account of the balance of payments (BoP), the full record of all money dealings between a country and the rest of the world.

• Measured in value (money, usually US$ or rupees), not in tonnes.

How a deficit forms (cause → process → result)

• Cause: the country needs many goods it cannot make or find at home.

• India imports large amounts of crude oil, gold, electronics and machinery.

• Process: its exports grow too slowly.

• Its earnings from goods exports do not grow fast enough to pay for these imports.

• Result: a lasting gap.

• The import bill stays bigger than export earnings. This is called a structural deficit (a deficit built into the way the economy works, not a one-year problem).

How the gap is filled, and why it can be dangerous

• Softeners inside the current account:
• Services surplus: the country earns more from selling services than it pays for buying them.
• Remittances: money sent home by citizens working abroad.

• If these earn enough, a big trade deficit can still leave only a small current account deficit.

• Softeners outside the current account:

• Capital inflows such as FDI (foreign direct investment, i.e. foreigners setting up or buying businesses) and FPI (foreign portfolio investment, i.e. foreigners buying shares and bonds), plus loans.

• Danger of a persistent deficit:

• The country keeps spending more than it earns.
• It pays the gap from its foreign-exchange reserves (the foreign currency held by its central bank) or by borrowing.
• Reserves run down. In 1991, India's reserves fell so low that they could pay for only a few weeks of imports. This crisis pushed India to reform its economy.

Where it occurs

• India: the main example of a deficit country.
• India has run a merchandise trade deficit in most years since independence.
• Older figure: about Rs 14.26 lakh crore in 2021-22.
• FY 2024-25: merchandise exports US$ 437.42 billion, merchandise imports US$ 720.24 billion, so the merchandise trade deficit was US$ 282.83 billion. It was US$ 241.14 billion in 2023-24 [3].
• Services surplus in FY 2024-25: services exports US$ 383.51 billion, services imports US$ 194.95 billion. The surplus of about US$ 189 billion covers a large part of the goods deficit [3].
• H1 2024-25 (April–September): the merchandise trade deficit was US$ 140.4 billion, but net invisibles (services + income + transfers) were +US$ 119.0 billion. Remittances alone were US$ 55.5 billion [4].

• Result: the current account deficit was only US$ 21.4 billion (1.2% of GDP), and foreign-exchange reserves rose by US$ 23.8 billion [4].

• The opposite case: surplus countries (favourable balance).

• China: its trade surplus grew from US$ 993 billion (2024) to US$ 1.19 trillion (2025). The rise came mainly from its trade with Europe, Asia and Africa [2].
• Germany and the Gulf oil exporters (Saudi Arabia, UAE and others) also run surpluses.
• China's surpluses are partly matched by deficits in its trading partners, which is why large surpluses create trade friction.

Don't confuse with

• Favourable balance of trade: exports are more than imports (China, Germany, Gulf states). An unfavourable balance is the reverse: imports are more than exports (India).
• Current account deficit (CAD): covers goods + services + income + transfers. The trade deficit covers goods only. India's H1 2024-25 trade deficit was US$ 140.4 billion, but its CAD was only US$ 21.4 billion [4].
• Balance of payments (BoP): the full record of all dealings, including the capital and financial account (FDI, FPI, loans). The balance of trade is only one part of the current account of the BoP.
• Volume of trade: the total value of goods and services traded (exports plus imports). The balance is the difference between exports and imports.

Prelims Hooks

• Balance of trade = exports − imports, and strictly it covers goods only. Services go into the current account.
• Unfavourable balance = imports > exports (India). Favourable balance = exports > imports (China, Germany, Gulf oil exporters).
• India FY 2024-25: merchandise trade deficit US$ 282.83 billion, but a services surplus of about US$ 189 billion [3].
• China's trade surplus: US$ 1.19 trillion in 2025, up from US$ 993 billion in 2024 [2].
• Trap: FDI, FPI and loans go into the capital/financial account, not the current account. Remittances go into the current account (as secondary income).
• NCERT: a negative balance means a country spends more than it earns, which ultimately exhausts its financial reserves.

Mains Points

• Causes of India's structural deficit (GS-III):
• Heavy imports of crude oil, gold, electronics and machinery, while goods exports grow too slowly. The result was a gap of US$ 282.83 billion in FY 2024-25 [3].

• Policy responses: PLI (Production Linked Incentive) schemes for electronics, cutting oil imports by expanding renewable energy, and export promotion.

• Effects and safety nets (GS-III):

• Services exports and remittances kept India's CAD near 1.2% of GDP in H1 2024-25 [4].
• A strong reserve buffer, such as the US$ 23.8 billion added in H1 2024-25 [4], protects the rupee against shocks like oil price spikes during Middle East conflicts.

• The 1991 crisis shows what happens when deficits continue and reserves run out.

• Global pattern (GS-I, economic geography):

• Surpluses are concentrated in a few places, such as China's US$ 1.19 trillion in 2025 [2], while other countries run deficits. This creates trade friction and encourages regional trade blocs.
• Countries that export mostly raw materials face falling terms of trade (each unit of their exports buys fewer imports) and big price swings. Adding value at home and widening the range of exports helps protect them from deficits.

Related concepts

• Balance of trade
• Favourable balance of trade
• Balance of payments

Read more

• Describing trade: volume, composition, direction and balance