Consider the following statements regarding India's trade deficit in early 2025:

Statement I: In the early part of 2025, India recorded its smallest trade deficit in over three years.

Statement II: The recent decline in trade deficit was driven by rising exports and a decline in imports.

Which one of the following is correct in respect of the above statements?

The correct answer is option 3.

In News

• India’s trade deficit in early 2025 was the smallest in over three years, recorded at $14 billion in February. However, this was not due to rising exports, but rather a simultaneous decline in both exports and imports, along with a high base effect from the previous year.

Key Points

• India’s trade deficit in February 2025 was the lowest in 42 months, standing at $14 billion.
  • Hence, Statement I is correct.
• While imports fell sharply (16.3%), exports also declined (10.9%), meaning the reduced trade deficit was not due to strong export performance.
  • The drop in imports was largely driven by:
    • A 62% decline in gold imports due to record-high domestic gold prices (₹87,886 per 10 grams), which dampened consumer demand.
    • A 30% drop in oil imports, as India diversified its energy sources in response to U.S. sanctions on Russian oil suppliers.
  • The fall in exports was linked to:
    • Weaker demand from the U.S., as American importers held back orders ahead of reciprocal tariffs set to take effect from April 2, 2025.
    • The high base effect from February 2024, which was a leap year and had higher trade volumes, making the year-on-year decline seem sharper.
  • A shrinking trade deficit caused by falling exports and imports signals weak global demand and economic uncertainty rather than a positive trade performance.
    • Hence, Statement II is incorrect.

Additional Information

• Impact of U.S. Trade Tensions:
  • The U.S. is India’s second-largest trading partner, with bilateral trade worth $118.3 billion in the last fiscal year.
  • The looming reciprocal tariffs announced by the U.S. have unsettled Indian exporters, impacting trade flows.
• Gold & Oil Imports:
  • Gold imports fell 62% due to high domestic prices, which dampened consumer demand.
  • Oil imports declined 30%, as India diversified its energy sources in response to U.S. sanctions on Russian oil suppliers.
• High Base Effect:
  • February 2024 saw higher trade volumes due to a leap year, making the 2025 trade figures appear lower in comparison.
  • This statistical effect contributed to the sharp percentage decline in both exports and imports, rather than an actual drastic fall in trade activity.