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

Running head: ECONOMICS 1
India
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1ECONOMICS
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

2ECONOMICS
for an economy like India, its comparative advantage is in the service
sector according to recent studies.
Principles or theories of Balance of payments
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