India’s Terms of Trade- Balance of Trade

India’s Terms of Trade

Terms of trade means the rate on which exports are traded with the imports. In other words, it indicates the quantity of exports which is given in exchange of one unit of import goods. The favourable terms of trade for a country implies that it has to export lesser amount of goods in exchange of a given amount of import-goods. India’s terms of trade is getting worse or we are facing the problem of unfavourable terms of trade. It means we are required to pay more and more with our exports for a given amount of imports every year. It is because of the reason that the prices of some of our vital imports are rising more speedily than the prices of our export items.

Process and Working of Foreign Trade

There is an important difference between internal trade and foreign trade. In internal trade country’s currency is used both by the buyer and the seller. But in foreign trade country’s currency is exchanged with the foreign currency. When we export we get foreign currency (or foreign exchange) and when we import we need foreign currency while foreign Countries get our currency (rupees). In this process of foreign trade exchange between different currencies may be required. Suppose an Indian trader exports goods to U.S.A., he earns dollars which he needs to convert into rupees. Similarly, if he imports from U.S.A., he has to buy dollars in exchange for his rupees.

Now the question is how the r1te of exchange between rupee and dollar is determined? In a free competitive market, the rate of exchange between U.S. dollar and Indian rupee will be determined by the relative demand for U.S. goods and capital in our country and for our goods and capital in the U.S.A. Keeping in view this criterion, the actual rate of exchange is generally fixed officially by the two countries.

Efforts are made to keep the rate of exchange free from temporary fluctuations in demand. In this task International Monetary Fund (IMF) plays an important role. IMF maintains the reserves of all currencies which are contributed by the member Countries according to their fixed quotas. Whenever a country is in shortage of a particular currency it can get it form the IMF reserves. But actually our imports have to be paid by our exports. The Reserve Bank of India controls the purchases and sales of foreign exchange and also maintains the foreign exchange reserves of our country. When country’s imports are higher than the exports, the foreign exchange reserve goes down and vice versa.

Balance of Trade

Balance of trade of a country means the systematic record of imports and exports of goods in a given year. We can find out the balance of trade of a country by deducting its imports from its exports.

Balance of Trade = Exports — Imports

If the exports exceed imports, balance of trade is said to be favourable and if imports exceed exports, it is regarded unfavourable. In India we are facing the problem of unfavourable balance of trade since independence. There are two main causes of this trade deficit

(i) Rapid and continuous rise in our imports over the years due to developmental requirements, food crisis and border disputes with the neighbour countries.

(ii) Slow progress in exports.

To overcome the problem of trade deficit we have to make efforts in two directions:

  1. Import Substitution—Import substitution means to promote and support indigenous production through indigenous resources especially the goods of imports.
  2. Export Promotion. Export promotion means promotion and expansion of exports. Now India is relying more on export motion.