Trade deficit results in the outflow of the domestic currency and as such withholding of the economy's domestic currency by other foreign nations could prove to be disadvantageous for the concerned nation.
As foreign nations could decide on selling the currency at any point of time driving the value of the concerned nation's currency towards the lower side.
Trade deficit in the Indian Context
With respect to exports and imports, India primarily executes trading transactions with China, European Union countries, UAE and United States. The country majorly exports chemicals; engineering goods; gems and jewelery; petroleum products; services; and textile merchandise. While its imports include crude oil and non-oil imports such as imports of precious yellow metal (gold).
The data pertaining to trade deficit in India is accounted and reported by the Ministry of Commerce and Industry.
According to 'The Economic Times' report, trade deficit in India increased to a seven month high in the month of May in the wake of surge in gold imports and ever-declining exports. Owing to weak global demand as well as government ban on gold trading in special economic zone (SEZs), the country's exports amounted to only $24.5 billion, registering a fall of 1.1%. However, imports soared to $44.64 billion witnessing an increase of 6.99%. Consequently, the increase in negative balance of trade is chiefly attributed to extensive gold imports that led the increase in trade deficit from $16.9 billion in May 2012 to $20.1 billion this year.