Balance of Payment and Comparative Advantage in India's International Trade

This paper examines the balance of payment of India and the gains made by India from comparative advantage in international trade. It discusses India's main export partners, bilateral trade agreements, and the diversification of India's export trade. The paper also explores the theory of comparative advantage and the principles of balance of payments. It analyzes India's trade balance, current account, capital account, and official reserves accounts. Finally, it highlights the gains made by India from comparative advantage by engaging in international trade.

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Introduction
In this paper, emphasis shall be put on the examination of the balance of payment of India
and the gains made by India from comparative advantage by engaging in international trade
The United States (USA) is the main export partner for the products of India at a rate of
sixteen percent (16%). China is India’s main source of important at a rate of 18 percent.
Additionally, the economy of India has various agreements of trade with its neighbouring
economies like the Asia Pacific Trade Agreement commonly known as APTA and south Asian
free trade (SAFTA). India has a number of bilateral engagements or agreements with the
economies of Korea, Singapore and Japan. In terms of Diversification, the export trade of
India is fair. However, diamonds (9.3 percent) and refined petroleum at (9.9 percent) are
the highest export value for India (Chakraborty, 2018). Gold at (6.6 percent) and Crude oil at
18 percent are India’s largest imports. Over the period of twenty years, it is clear that India
has been experiencing an increase in the export of its services. For instance in the year 2005
the total trade of the UK with India stood at positive £100m and in the year 2015 it was at
negative £800m. As per the year 2018, through the entire globe India was able to ship
products worth US$323.1 billion. The Asian countries contributed the largest proportion of
India’s exports at a rate of (49.3%), north America at 18 percent, Europe at 19.3 percent,
oceans at 1.3 percent, Latin America at 2.9 percent and Africa at 8.3 percent (Datt and
Sundharam,2009).
Literature review
Theory of comparative advantage
The theory of comparative advantage asserts that economic welfare increases, if a country
puts much of its focus in the production of goods and services with which it has the least
opportunity cost (Eaton and Kortum, 2012). In other words comparative advantages take
place when one economy or country is capable of producing a service or good at a relatively
lower opportunity cost when compared to the other. Therefore for an economy like India,
its comparative advantage is in the service sector according to recent studies.
Principles or theories of Balance of payments

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The balance of payments refers to the country's economic transactions record between the
rest of the world and the residents of that particular economy. The official reserves account,
capital account and the current account are the main components of the balance of
payments (BOP). The balance of payment has three important approaches and they include
the Monetary Approach to the Balance of Payment, The Absorption Approach to the
Balance of Trade, The Elasticity’s Approach to the Balance of Trade
India’s trade balance
In the past ten years, the economy of India has been experiencing a trade deficit. As per the
year 2015, 1.5 percent was the overall India’s share of merchandise goods exports. In this
year march, 2019, the trade deficit reduced down to around USD 10.89 billion (Datt and
Sundharam,2009). As per year 2018, USD 29.17 billion was the overall total of India’s
merchandise exports compared to USD 32.55 billion in March 2019. For the past ten years,
India’s balance of trade has been at an average rate of 2564.93 USD Million with 2012
registering the record low of USD Million -20210.90. In the year 2017 alone the total imports
for India stood at $417B and exports at $292B leading to a trade deficit of $125B. It is
imperative to note the main reason why India has been experiencing sustained trade deficits
for a long time has been mainly due to the ever increasing growth in imports of jewellery,
semi precious and precious stones, waxes and oils, pearls and Bituminous substances and
mineral oils. Indonesia, Hong Kong, United Arab Emirates, US and the United Kingdom are
India’s biggest trade deficits (Thakur and Sunil, 2009).
Current account, capital account and official reserves accounts of India
As per the end of 2018, the total current of India stood at 181.330 USD. In the year 2012, is
when the lowest current account was attained at -31857.18 USD and highest in the year
2004 at 7360 USD Million. The poor performance of the current account is due to high
imports when compared to the exports(Datt and Sundharam,2009).
In the year 2018, the capital account of India was at -76.350 USD mn. The overall average of
India’s capital account from 2009-2018 stands at 6.919 USD mn. In the year 2013, is when
the highest was attained at 766.967 USD mn and the least was in 2011 at -271.465 USD mn.
The official reserves accounts for the past ten years have been at an average of 221697.94

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USD. The highest figures were experienced in 2018 at a level of 426080 USD Million
(Chakraborty, 2018).
Table1 ledgers showing debit and credit entries for current account, capital account, official
reserves accounts and other accounts for India (Datt and Sundharam,2009).
Gains made by India from comparative advantage by engaging in international trade
According to the Ricardo's model of comparative advantage, it is important for an economy
to specialize where it has high empowerment of factor in puts that are used in the
production of that particular product or service(Datt and Sundharam,2009). In other words,
total output can be increased if each economy chose to specialize in the area where it has
an advantage. It is clear that over the recent years, the economy of India has increased its
overall participation in international trade. When looking at India trade balance and export
trade, it very clear its overall revealed comparative advantage is products and services like
in iron ore, pharmaceuticals, gems, film, green energy and IT outsourcing. It is important to
note that aspects such as the non price competitiveness of producers, quality and quantity
of the available factors of production, import controls like quotas, export subsidies and
tariffs are vital determinants of comparative advantage (Datt and Sundharam,2009).
Therefore India by focusing on products where it has a high comparative advantage is able
to produce efficiently and compete with other countries which could not be possible if it
focuses on products where it has a least comparative advantage. Henceforth focusing on

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items where an economy has a least opportunity cost is important in boosting the export
trade and improving the balance of trade (Eaton and Kortum, 2012).

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References
Chakraborty, S. (2018). "Only 5 states account for 70% of exports, Economic Survey shows".
Business Standard India.
Datt, R., Sundharam, K.P.M. (2009). Indian Economy. New Delhi: S. Chand Group. p. 976. ISBN 978-
81-219-0298-4.
Eaton, J., Kortum, S. ( 2012). "Putting Ricardo to Work†". Journal of Economic Perspectives. 26 (2):
65–90. doi:10.1257/jep.26.2.65
Thakur,A,P., Sunil, P. (2009). 21st Century India: View and Vision. Global Vision Publishing House. p.
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